The European economic crisis has sparked debate over whether the euro could survive. North by Northwestern reporter Alex Nitkin sits down with political science professor Stephen Nelson to discuss the Greek debt crisis and how America should remain wary of it.
Q: For anyone who hasn’t been keeping track, could you give us a brief explanation of the economic crisis that’s unfolded in Greece?
When Greece started using the Euro in 2002, that drove the currency’s inflation way down, which attracted a lot of investors who wouldn’t have to worry about devaluing of currency. So when the debt was denominated in Euros, money started to pour into the country in droves—a tidal wave of money flooded into Greece. But Greece spent like crazy, and as a result their debt exploded. It eventually reached $500 billion, which is more than the debts of Argentina, Brazil and Mexico put together. They couldn’t cover revenue expenditures, so they had to bring in other countries to buy their debt…and now no one wants to do that.
Q: Greek Prime Minister George Papandreou announced this week that he’ll be resigning to form a new unity government. What’s the reason behind that decision, and how likely does it look that that will alleviate some of Greece’s problems?
He resigned first and foremost because he was extremely unpopular. The Greek populace didn’t like him very much, and he didn’t have any support in the government, so to avert having a nasty electoral process which might reduce investor confidence, he decided he would step down. The thinking behind this was that maybe Greece could draw more confidence from investors if there were a new unity government and they could prove to the investment community and to Europe that the government is credible and committed to reform. One of the things they’ve tried to do is bring a lot of non-professional politicians into the government, so they have people in office who can manage the crisis without playing politics—Greece can’t afford to have the kind of political conflict the U.S. had during the debt ceiling debate. The problem is that it’s not working very well—after a new prime minister was proposed, and opposition party stormed out of the proceedings. So while the point was to show that Greece would have a more stable government, all they’re really showing is that the situation is even more chaotic than ever…it’s actually pretty common to see political systems fall apart in times of economic crisis.
Q: Some people have talked about the possibility of Greece leaving the ‘Euro zone,’ meaning that they would go back to using their own currency. How likely does that look, and what would it mean for Greece and the rest of Europe?
I think that the likelihood is pretty high—I’d say there’s probably well over a 50 percent chance that they’ll leave the euro. The Greek people proclaim publicly that they want to stay with the euro, because it’s a point of national pride and it was a serious crowning achievement for the European economy. On the other hand, though, the Greek people are in the streets right now protesting the very things they would have to do to stay in the Euro zone. To stay, they have to cut back on spending, lower wages, reform the whole system…and these are very painful processes. I think they’re not going to recover until they leave the Euro—there won’t be any clear boost of competitiveness while they’re staying with the euro. But leaving the euro zone would be like hitting the reset button: the value of the currency will go way down, meaning that tourism will be cheaper, exporters will be able to be more competitive, and more investors might be attracted. So leaving Euro zone has some very attractive elements. But there are also severe costs to going back to the drachma, Greece’s old form of currency. If they do, the same kind of default that happened in Argentina 10 years ago is likely to happen in Greece—that means big time losses for people who have savings in Greek banks. But after that happens, you might have serious economic growth for a decade, the way Argentina did.
Q: How much of the crisis has been caused by negligence? To what extent are the Greek people and leaders to blame for what’s happening?
There’s a lot of blame to go around, but I’d be careful to blame the Greek people. Just like in the U.S. right before the 2008 economic downturn, there just weren’t a lot of forces for restraint. If you put a lot of money in front of people, they’re going to spend all of it—and that’s exactly what they did. I think most of the blame can be put on the previous conservative government—which was in power before [Papandreou]—who ran up debts that were not on the country’s balance sheets. What that government did was take revenue streams, like the national lottery, and package them together to sell as securities to private investors. But they didn’t publicize that they didn’t publicize that they were doing this, and when all this stuff came out, it became clear that Greece was in a lot more debt than people thought, that’s what led to this situation being so severe. So they really deserve a lot of blame for setting up what’s happened.
Q: Why should Americans, especially American college students, care about this issue? What effect does it have on our economy?
We live in an era of globalized finance, and the US is deeply integrated into the global economy. And even if you don’t have any investments, your life depends on what goes on in the financial system—if you want to borrow money to go to college or grad school, all that goes back to the financial system. So if Greece defaults, that would have consequences on American banks, which would have a serious impact on your lives. It’d be harder to borrow money, harder to get a job and harder to get a loan. The situation is all very complicated, but we’re way past the point where we can seal off their economy from our own and pretend that it doesn’t affect us.