Dollars and Sense: Deconstructing a Greek drama

Context. The big economic news around the world last week continued to be Greece. Back in 2012, Greece was on the brink of economic ruin and it looked like it might also tear apart the eurozone. But the European Union and the International Monetary Fund bailed the country out, to the tune of about €240 billion. But Greece had to agree to some severe austerity measures, including deep cuts in government spending. That had a huge effect on Greek citizens because of the extent to which government spending drove the Greek economy.

Austerity to unrest. Those austerity measures rankled Greek voters, creating political unrest. Leftist political party Syriza, previously a fringe movement in Greece, suddenly rose to the top by saying Greece shouldn’t have to submit to its European Union overlords. A couple of months ago, Syriza was voted into power, against all odds. The party is now trying to re-negotiate the terms of that bailout.

Breakdown and restart. A week ago, last Monday, those talks broke down, and that’s where things get interesting. The breakdown in those talks did not cause a collapse in the financial markets. In 2012, when Greece first had its crisis, the markets plunged into near disarray. But since 2012, European Central Bank President Mario Draghi has implemented a number of new steps that have made the European Union much stronger.

Quantitative easing. One of those steps has been an American-style quantitative easing program, a bond-buying scheme similar to the one Ben Bernanke started. Draghi is getting a lot of credit for masterfully guiding Europe through difficult financial waters, and quantitative easing—essentially printing money to buy bonds—is getting a lot of credit for being a near “magic bullet” for taking the highs and lows out of the economic cycle.

Unintended consequences. But quantitative easing is not a new tool. Japan has been using it for years, and the results have not been great in that country. Its economy stagnated through the ’90s when every other developed country in the world was booming. They came to call it Japan’s “lost decade.” Then the stagnation continued, and the “lost decade” became the “lost generation.” Some economists say the world has changed, that in Europe and the United States, in particular, population growth has slowed, or even reversed. And that the biggest threat to developed economies is not inflation but deflation. But there’s an old saying that everyone who has studied economics knows: “The most dangerous words ever uttered are: This time it’s different.” The basic laws of economics are still in effect. All of which is to say: No sound economy can be based on debt and money that has no value.

Bottom line. The euro is now near record lows. That trend began long before quantitative easing, but it’s hard to see how printing more euros will help that situation. It’s too early to say quantitative easing will be a disaster for Western economies, as some libertarian economists predict, but it’s also way too early to call it a panacea for all that ails the world’s economies.

Listen to "Dollars and Sense" on The World and Everything in It.