THE EUROPEAN MESS EXPLAINED

I am going to try to explain what is happening in Europe, especially Greece. Now everybody who knows me knows I am not an economist. I don’t even balance my own checking account. But I think I can paint a word picture explaining the mess in Europe.

Greece is a member state of the European Union as California is a member state of the U.S. So I am going to use California to explain. I could use any state but as I have said before, it is more fun to pick on California. California is deeply in debt and they need a bailout from the Federal Government. The Feds tell California that in order to be bailed out, they must change their way of doing business. They must reduce their obligations to pension funds, salaries, and most of their giveaway programs. When Californians hear of this, they object. They much prefer the debauchery of their past. So they decide to secede and elect a government which will then print its own money and continue life as it has always been. Well there are problems with this. First, paper money is nothing more than a promissory note. California, like Greece, is deeply in debt and they owe much more than they take in. Hence the 19 billion dollar deficit California faces. Ergo, their paper money, let’s call it the “Golden Bear,” would be worth about half of a U.S. dollar. That means that a five U.S. dollar artichoke would cost ten California golden bears. Since one could then go to Nevada and buy an artichoke for five dollars, California doesn’t get the money.

Of course there are many other problems with California seceding from the U.S., like forming their own army for defense, controlling their own borders, and generally protecting themselves from the chaos that would ensue with runaway inflation. In a matter of days, most Californians, especially the wealthy, would pack up and move to Texas and try to turn that state into the cesspool they just escaped from. California’s roads and bridges would deteriorate, their cities would crumble from lack of maintenance.  Remember, there would be no Federal money so Californians would have to go it alone. I could go on, but I think you get my drift. It just would not be pretty.

So Greece says, like California, we don’t like the austerity measures the European Union is requiring of us so we are just going to return to the past. We will print our own drachmas. Unfortunately, because of the debt they have incurred, their drachmas will be worth about half of a euro. Their five euro shot of ouzo will cost ten drachmas. Other governments who have purchased Greek debt will require repayment in real money, not worthless drachmas. Of course they could not pay, so they would then go into default. Basically the rest of the world would then have to foreclose on their debt. The once great country of Greece with all its history would be divided up among her creditors. At that point, whether the Greek citizens like it or not, they would then be the subjects of other governments and under their laws.

For world markets the event would be disastrous at least in the short term. I believe most of the world has been divesting themselves of Greek debt for several years so that would be the justification for calling it a short term problem. Any way you look at it though, it would continue to be a mess for some time.

Now some of you Californians are asking, “What would happen to us?” I suspect your beautiful state would once again be settled by pioneers who would establish a new government which would immediately attempt to rejoin the union. I can assure you however, that the new state would look nothing like the old one.

I hope you enjoyed this little example of Economics 101. If you have a better explanation, I would love to hear it. In the meantime, hang on to your IRAs and savings accounts. It promises to be a wild ride.

Ron Scarbro June 20, 2012