Alexis Tsipras, newly-elected leftist Prime Minister of Greece.
As Greece recently swore in Prime Minister Alexis Tsipras, the world swore, too; the left-wing Syriza party formed an unlikely coalition with the right-wing Independent Greeks in opposition to fiscal austerity (cutting federal spending to attempt to readily pay debts).
Since the 2008 financial crisis, Greece has largely abdicated its fiscal policy to three intergovernmental organizations known as the “troika”: the European Union, the European Central Bank, and the International Monetary Fund. These three groups bailed out Greece to the tune of 240 billion Euros ($268b USD). The new coalition government wants to renegotiate the terms of the debt agreement to better manage, perhaps by paying less than what they borrowed.
Many have been critical of the request, as it seems like giving over a quarter of a trillion dollars to a country with just over 10 million inhabitants would stimulate their economy significantly. But, despite what Keynesians would have you believe, providing this kind of capital did not solve the issue of high unemployment. To the contrary, unemployment skyrocketed from just 7.3% in 2008 during the financial crisis to 28% in 2013. It’s no surprise that Greek voters wanted a change, one that would ensure that debt obligations could be met while also ensuring that the Greek economy does not suffer.
This case study is a poignant warning for countries that are considering a reliance on other countries or international agencies to solve their economic woes. Not only was the Greek bailout ineffective and the cause of much political drama and wrangling between European states, it led Greece’s debt to balloon to 175% of its GDP. History could allow Greece to be optimistic, since Great Britain had debt over 250% following World War II and still managed to reduce this figure to 50% within 30 years, it nonetheless puts Greece in an uncomfortable position, especially considering the lack of population and productivity relative to Great Britain.
A BBC graphic shows the results of the parliamentary election and a comparison to the previous results.
It also points out the problems with using a single currency throughout most of Europe. The fact that small countries like Greece and larger, more prosperous countries like France and Germany use the same currency means that, in effect, capital is transferred from the latter category to the former. This will be especially true if Greece’s coalition government is able to lower their debts as part of a renegotiation. Most importantly, it puts the effectiveness of the work of hundreds of millions of people into the hands of a few politicians and central bankers who make these macroeconomic decisions.
The solution is to popularize private currencies that are not restricted to state borders or multi-state configurations such as the Eurozone. This balances optimal currency areas so that, if Currency A is best suited for a part of Greece, Currency B for another part of Greece, Currency C for northeast Germany, and so on, currencies will be flexible and not permanently relegated to a set of pre-defined borders. A number of factors such as worker productivity, culture, and geography all play a role in what boundaries this area will take on. The areas that utilize each currency will be able to vary over time as population densities and worker productivities change at varying rates in different locations.
In addition to monetary policy reform, the need for centralized fiscal policy is demonstrated to be unnecessary based on the ineffectiveness of the Greek bailout. Instead of states shuffling around hundreds of billions of dollars based on the decisions of only a few people, free trade and enterprise can solve these problems much better than any government intervention. A reduction in public spending will also negate the need for a bailout in the first place as the governments of nations with troubled economies will not have to worry about meeting their debt obligations.
Instead of using fiscal policy to try to “bail out” countries that struggle economically, private debt can be restructured in a similar manner to the current Greek debt (the subprime lending crisis and student loan bubbles in the US are parallel examples) and the problems will be resolved much more quickly. Businesses that lent too much money to those who couldn’t pay it back will go out of business, and more responsible ones will remain. By allowing the market to solve problems this way instead of propping up failed businesses like the US did in 2008, this will ensure that markets are stable and prosperous in the long run.