This past weekend, Greeks overwhelmingly voted no for austerity measures that would help aid the country. News of the vote has sent the media into a frenzy, with concerns of how this will affect the stock market, and the world economy, in general. So you must be wondering, how does this affect me?
The Greeks have been around for thousands of years and the current crisis isn’t going to transform them into a lost civilization. However, and that’s a really big HOWEVER, it is going to mess with their economy and have a lasting effect on the rest of the world for years to come.
So, back to you… how will Greece’s failing economy affect you? The short answer is, it can end up making the stuff you buy more expensive.
Like gaining weight, the crisis in Greece didn’t happen overnight
Before we get into the players, the politics, what’s next and a longer answer to how this affects you there are some things you should probably understand. This crisis didn’t happen overnight.
Like a pair of pants that used to fit and are now too tight the process took a while. Just like getting back into those pants is going to take some work fixing, this crisis is going to take time and hard work.
The root of the problem goes back to the early 2000s when the Greek economy was stagnate and the country began to accumulate debt. In December 2009 the Greek government acknowledged that their debt had reached 300 billion Euros, which was the highest in Greek history. Their total debt was 113 percent of GDP, or almost double the 60 percent they were allowed as a member of the Eurozone.
The first signs of a mounting crisis happened when the EU insisted that Greece reduce their spending. In February 2010, the recently elected Prime Minister George Papandreou cut domestic spending which caused people to protest and riot.
Meet the players
The European Union — The EU is an association of 28 countries that form a single economic market that is overseen by a system of supranational institutions that make negotiated decisions for the entire union. With few exceptions, they share a common currency, the euro.
While they are not a single country with independent states, like the United States, their economic structure is similar. For example, even though Texas competes with California for business, they both agree that it’s better for one of them to win the competition, than Canada.
The International Monetary Fund — The IMF is an international organization consisting of 188 member countries. Their mission is to cultivate global monetary cooperation and therefore create financial stability that fosters international trade. Basically, the IMF acts like the world’s parents when it comes to money. They help to develop policies that benefit everyone in order to ensure that the global economy hums along smoothly.
Germany – The Germans have the largest economy in the EU and the fourth largest economy in the world. Even though the EU is democratic, body size does matter when it comes to influence, and the Germans have outsized influence within the EU. The Germans are also important players because they are the strongest member of the EU and the ones most capable of acting independently to provide financial assistance.
Flash forward to the present
Greece has received several rounds of emergency loans from the EU and the IMF, led by the Germans in exchange for promises of greater austerity. Greek politicians are no different than politicians anywhere else — their actions center on staying in office.
The current Prime Minister chose not to pay back loans, because it would mean having to make further domestic spending cuts, which would make him wildly unpopular. Instead, he has asked that the debt be restructured (payments lowered) so they could afford the payments without having to trim spending.
The story is not over and even as this article is being written, negotiations with Greek leaders are underway to reach some kind of deal with European creditors to keep the country from losing the euro. However, regardless of how this plays out in the coming hours, days and weeks will make a difference in the long-term effect of the crisis.
Now that the Greeks have voted no on austerity measures, this means they could end up leaving the EU, which would give them the ability to print their own currency again, which creates a set of complicated financial issues, mostly for Greece. The strength and credibility of the EU are also at stake, in terms of how its other financially troubled members — Spain Portugal and Ireland, react.
How this affects you
The effect of this crisis on your personal bottom line is complex. Chances are, any money you have invested in mutual funds and retirement accounts have all divested any interest they may have had in Greek bonds. The problem is they may still have money invested in banks that are holding Greek debt, and may go bust if that debt is not repaid.
The world financial system is deeply interconnected and a failure in one place can have an impact on seemingly unrelated banks and financial institutions elsewhere. Even though Greece is a small part of the EU, its default, even for a short time can have a ripple effect throughout the EU, which collectively is the world’s largest economy.
Further damage to the still fragile European economy may not send into a tailspin, but might be enough to devalue the euro, which would have an effect on interest rates, which in turn, would have an impact on the U.S. recovery.
The bottom line is, what happens to the nation of Greece can have a significant impact in places like Athens Georgia, Athens Pennsylvania and Athens Ohio.