Instead of Asking if Greece Will Stay, We Should Ask Who’s Next


By Alex Gold

Fingers are pointing and blame is flying — the Greek debt crisis is the fault of the Greek government, or the Greek people, or the banks, or the ECB, or Angela Merkel, or….At this point, no one really knows whether Greece will be a part of the Eurozone in another week or another month. I think it’s more likely than not that Greece will stay, but only by a small margin.

What we can say for sure — and should say loudly and often — is that there will be another Greece absent real structural reforms. A peripheral Eurozone economy will find itself unable to pay its debts and another round of “he-defaulted, she-defaulted” will follow.

The Next Time: A Preview

The next country to end up where Greece finds itself now will follow an unfortunately familiar script. First, a serious recession will force a Eurozone government to socialize once-private debt. When that happens, even a fiscally responsible country will approach its creditors with hat in hand, saddled with the trifecta of billions or trillions of euros of newly minted public debt, sputtering tax revenue due to the wounded economy, and swollen payments to public support programs for the newly jobless.

Spain, Italy, Ireland, and Portugal more or less walked this path during the Great Recession. Spain, in particular, was previously in good fiscal shape; Spanish public debt as a share of the economy was much lower than in the U.S. prior to the recession. It was the banks, especially the small, uniquely Spanish, cajas that got into big trouble betting on construction projects. The need to bail out the banking system changed that picture very quickly. The situation was similar in Italy, Ireland, and Portugal.

None of those countries are entirely out of the woods yet — but it seems likely that a resolution will be reached. The real question is whether political leaders in the Eurozone want to take the chance of having to deal with this again. Greece has 11 million residents and not quite $0.3 trillion in GDP, which is relatively small against the backdrop of the Eurozone’s 335 million residents and $11 trillion GDP. In terms of GDP, Greece is roughly equivalent to the Atlanta, GA metropolitan area ($0.296 trillion). But Spain has four times as many residents as Greece and an economy five times larger. Italy is yet bigger.

Whether Greece remains in the euro or not, the long-term problems will not be fixed by themselves. Greece, part II, will be next, or Portugal, or Spain, or Italy.

Next Time Will Not Be Different

This time, the debt crisis was preceded by a Greek government that took on unreasonable debt, Spanish banks trying to punch above their weight, and large Irish banks over-investing in property. We don’t know what will precede the debt crisis next time, but we do know what will follow.

The real problem is that the Eurozone is fundamentally set up to exacerbate debt crises in peripheral members. As Matt O’Brien of The Washington Post colorfully puts it, the euro is, “a doomsday device for turning recessions into depressions.”

Like the Eurozone, the US has one currency. But unlike the Eurozone, we have mechanisms for transferring money from richer to poorer states, and from stable states to those in crisis. In typical times, this looks like the normal functioning of the public safety net. Programs like Medicaid, TANF, unemployment insurance, and SNAP transfer money from richer people to poorer people (and thus from richer states to poorer ones). These policies, along with the ease and frequency with which Americans move from state to state for jobs, help stabilize American incomes and ensure that the economic cycles of the states remain roughly synced up.

Moreover, when there are financial crises that affect some states more than others, the federal government is usually responsible for cleanup. For example, about 60 percent of the impact of the Savings and Loan crisis of the 1980s occurred in Texas. The bailout from the federal government amounted to about 25 percent of Texan GDP. Since it was the federal government that did the bailing, all of the other states transferred money to Texas – and here’s the key – they never expected to get paid back.

The real strength of the federal government isn’t that it’s bigger or more diversified than the state governments – its that the responsibility for cleaning up is with the same people who can print the money. It’s all about the Benjamins, baby.

Contrast this with the situation in Greece: a country with no control over its own currency borrows more than is prudent for some reason or another. Without any long-term plan for stabilizing their borrowing, creditors still expect to get paid back. Silly creditors, repayment in full is for rich nations that control their own currencies.

What now?

The overriding policy concern is pretty clear – if we want to avoid Greece ending up right back here or having another country in the same place, the Eurozone needs a more robust system of automatic stabilizers for the economy and the financial system. These automatic stabilizers need to a) help synchronize the economic cycles of the constituent members of the Eurozone and b) ensure that those who have to clean up the economic messes have all the tools to do so (aka can print the money).

There are some steps being taken in this direction. For example, the Single Resolution Mechanism, which is being implemented, serves a Eurozone-wide function roughly similar to the Federal Deposit Insurance Corporation. But this isn’t nearly enough.

Maybe leaving the Eurozone is what’s best for Greece economically. After all, Greece’s economic cycles are probably not terribly well-synced with the large, highly-developed economies of Germany and France. But the Eurozone has never really been an economic project – it’s a political one. Given that reality, keeping Greece in the Euro makes a lot of sense. But the focus should be  not only on this crisis, but on the next one. Without a much more aggressive effort to ensure that their member countries remain on roughly equal fiscal levels, Grexit is just the beginning.

Alex Gold is a research associate in the Economic Studies program at the Brookings Institution. He is a native of Takoma Park, MD and spends much of his free time cooking, working on his handstand, and practicing and teaching martial arts. He holds a BA in Math and Economics from Wesleyan University and a MA in Economics from Duke University.