Grexit and EuroGate
09 July, 2015
Greece voted to reject the international offer to pay some of its enormous debts in exchange for continued budget cuts. By the time they voted the offer had expired anyway.

Most Greeks don’t much trust their own government but they are even angrier at theircreditors, particularly Germany, believing that they are being treated unfairly.

Greece was a military dictatorship until 1974 and asked to join the European Community as soon as the military government left. Greece’s relationship with the EU
was closely connected to its democracy and prosperity because the EU gave a great deal of funds to Greece. But in recent years, Greece continued to be quite corrupt, and borrowed lots of money that it handed out to public servants and pensioners enjoying early retirement, while the population refused to pay taxes. For years the government lied about its statistics. But for the last six or seven years, it has solved many of those problems. But now it is still burdened with crushing debts that it can not pay.

The Greeks tend to forget that they lived beyond their means on borrowed money and to think the world or Europe owes them something. The Germans tend to forget that after WWII they had most of their debt forgiven.

Greece owes the European Central Bank as well as Germany, France, Italy, Spain and the International Monetary Fund. They have already officially defaulted and are very frustrated. Nevertheless, 40% of Greek voters said they should accept the offer by the creditors and stay in the Euro. But 60% said no and rejected the offer of the creditors. Greek banks have closed, there are few financial transactions and nobody knows what will happen. Most Greeks don’t trust their own government much, but they are even angrier at their creditors, particularly Germany, believing that they are being treated unfairly. Germany and the creditors feel that Greece must pay its debts and has refused to do so. Unfortunately, there is plenty of emotion, self-righteousness and nationalism on all sides of the issue. The Greeks tend to forget that they lived beyond their means on borrowed money and to think the world or Europe owes them something. The Germans tend to forget that after WWII they had most of their debt forgiven.
There is an economic disagreement at the heart of this. One group thinks that in an a specific country the less money a government spends and taxes it collects, the better the economy will be in the long term. The other group thinks that when an economy is bad, the government needs to spend money to get the economy going. The second group is correct. The problem is that countries that get used to spending money when the economy is bad tend not to save money when the economy is good so they end up with big debts. Then these debts crush the economy.
When the Euro was set up, the idea was that it was a step towards political union, towards the United States of Europe. But as soon as the Euro was born in 1999, members started to back away from political union. Some countries kept their debt under control and some didn’t. And which countries those were varied over time. At the start Germany had problems, but later it was Greece and other Mediterranean countries. When the global economy collapsed in 2008, the cost of borrowing went way up and Greece was in serious trouble. In the case of the Euro, there was no way to force individual government to keep their spending under control. Step by step that is changing and the Euro Zone and the EU are slowly getting more control over the expenditures of individual national governments. So, slowly the United States of Europe are appearing.
There are some members of the EU that are not in the Euro Zone, and that works fairly well. More and more countries will join when it works out its problems. Or they can stay out, which is easy to do; even for EU members, it is completely voluntary. Some say that this crisis shows weakness in Europe. I disagree. I think it shows strength. Gradually, Europe is learning and solving this. The question about Greece is whether it will stay in the Euro Zone or not. If they leave, it will be extremely difficult for them. They will have to bring back the Drachma. Few will lend them money. But in the end they will manage. Russia will help and others will as well. The Euro Zone will show itself and the world that they couldn’t be blackmailed but there may be some animosity from the Greek public. If Greece stays in, that will probably mean that some of their debt is forgiven, but that will only happen if the agreements on each aspect of governance that has led to this crisis become way clearer. So either way Europe will end up stronger.
What does this mean for Georgia? Quite a few things. There are lots of Georgians living in Greece and they send money home but the Greek economy is so weak this that money is shrinking. This will not help the Georgian economy. Russia is doing whatever it can to try to divide the EU so Putin is spending time with the Greek Prime Minister to annoy the rest of Europe. But this doesn’t mean much. The lesson about running up high government debt is an important one but Georgia has been very solid on that regard. It should continue that way. One of the biggest problems Greece had was its lack of predictability. Its policies have been all over the place. This tends to scare away international capital. Georgia has the same problems, some times coming up with new policies and initiatives impetuously or for unclear reasons. That is one of the main reasons international investment has decreased. In the end, debt takes both a borrower and lender. Both sides do this willingly, so the best thing is to stop the blame and to focus on solutions: Always a good advice for Georgia.