As yet another deadline for Greece and the eurozone approaches, we once again find ourselves considering what a Greek default might mean for the U.S. and world economies. First, though, let’s take another look at what’s actually going on with Greece and Europe.
The Greek crisis boils down to a conflict between one group wanting to spend money that’s not there and another that wants to impose discipline—fiscal irresponsibility versus fiscal rectitude. The metaphor that comes to mind? A teenager with a credit card. I last used this trope in describing the U.S. Congress during the fiscal cliff, but it’s equally appropriate here.
Eurozone family dynamics
Not unlike Congress, the eurozone is a large dysfunctional family. In the north, represented by Germany, Mom (Angela Merkel) and Dad (Wolfgang Schäuble) are working hard to keep the family going. The kids have varying degrees of responsibility, but Greece is the real problem child. He’s run up Mom and Dad’s credit cards and is now throwing a tantrum at the prospect of cutting his spending and repaying the charges.
The crisis has been brewing for some time. Mom and Dad have periodically written checks just big enough for Junior to pay off most of the interest on the credit cards, but not to resume the lifestyle he really wants. He’s been able to borrow some money from an indulgent uncle (the European Central Bank) and grandmother (the IMF under Christine Lagarde). But after a talk with Mom and Dad, Uncle ECB is pulling back from further lending, and Grandma Christine said she actually wants some of her money back.
Things aren’t looking good for Junior.
The crisis comes to a head
Greece is now threatening to move out, essentially saying, “If you’re not going to pay my bills, why should I obey your rules?” Dad, the German finance minister, is taking a tough love stance. Mom, who doesn’t want to break up the family, may be inclined to bend a little. Grandma is more on the tough love side, but mainly because she wants her money back. Don’t mess with Grandma Christine.
If Junior moves out—that is, if Greece leaves the eurozone—the family will never be the same. The fighting and recriminations will probably keep the neighbors, including the U.S., up at night, and depending on how ugly it gets, could impact their property values as well. The damage may be significant, but it should be temporary in those countries.
For Greece, the short-term damage would be severe but not necessarily long lasting. As in Iceland’s case, an adjustment, although extremely painful, may ultimately lead to a better outcome.
If that happens, though, it could be even more damaging to the family. When one kid leaves and actually prospers by ignoring Mom and Dad, the rest of the kids (especially those who have only behaved under duress) may be tempted to follow suit. France, Italy, and Spain will be watching the prodigal closely as he starts to pack.