The government of Greece, pushed by the European Union and the International Monetary Fund, has imposed tough austerity measures upon the Mediterranean nation. Sales taxes have gone up, wages have gone down, as has government spending. The combination of these actions has resulted in large protests.
Why is the government of Greece taking these actions? To put it in simple terms, Greece is out of money and has the lowest credit rating on Earth. Even with these tough measures, the Greek economy is only surviving due to the bailouts provided by its European Union partners, especially Germany, who has recently pledged to support additional bailouts if needed.
How did Greece get in this position and why should we even care? Unfortunately, what happens in Greece does matter to us. Like dominos, the fall of the Greek economy could have disastrous consequences for the global economy. Though Greece is in the worst situation of any European economy, Portugal and Spain are also in danger of defaulting on their financial obligations to their debtors.
The world economy functions on confidence. Banks and nations lend money because they think they will get it back, over time, with interest. Greece was able to borrow money because for a long time they fudged the numbers on their budget deficit and made their country look like a reasonable place to invest. When the true nature of their financial situation became known, Greece’s economy fell apart and their ability to borrow money declined severely.
So they got bailed out.
If Greece were to default on their debt now, it would likely cause banks and lending nations to lose confidence that Portugal or Spain would pay them back as well. And if confidence is lost on a large enough scale, here is what could happen: banks would lose tons of money and a huge hole would be punched into the budgets of Germany and other strong European economies. These countries would then in turn need to borrow money, at the exact moment when banks and lending countries would be reducing how much they lend.
This crisis would damage economic growth in Europe and crush the confidence of the global financial system. The United States, already in danger of having their debt downgraded, could see that it becomes harder and harder to borrow money. Why would China or other nations with budget surpluses lend to the U.S. when they have seen lending nations in Europe take a total loss on their investments?
Even Canada, with our strong economy, would be in huge trouble. If the U.S. economy goes down it will take ours with it. Sure, you might think we could just sell more oil to India and China, two big and growing economies. But do you think the economies of China and India will be growing if nobody in the U.S. or Europe has money to buy the products they manufacture?
This is how a simple case of the Greek government overspending could bring down the global economy. It may seem farfetched, but don’t forget that the global financial system almost imploded simply because many American’s could not afford their mortgages. This outcome is by no means certain and is just one of many possibilities, but it’s important to recognize that the global economy is now more interconnected than ever before and what happens in one country effects us all.
Spencer Fernando is the Comment Editor for the Manitoban.