The deadline for Greece to reach a deal on its relationship with Europe is fast approaching. It is still possible that a last minute agreement can be reached but it looks increasingly doubtful. On the Greek side, there is a deep resentment of the measures that Europe is demanding for continued borrowing combined with a growing mistrust of all political parties. The Prime Minister, elected on a promise to end austerity without leaving Europe, finds himself in tighter and tighter corners. Meanwhile, European lenders complain that Greece’s problems are of their own making – a combination of too rich benefits (to be fair, Greek retirement benefits in particular would have made most people in the world envious) and a reluctance to crack down on wealthy and middle-class tax cheats.
Regardless of where you stand on the Greek situation, you have to wonder what the impacts will be for Greece, Europe and the world. Greek banks are closed and the ability of ordinary Greeks to get their hands on their own money is limited. The fear is that a run on the banks will lead to a complete financial collapse and destroy the ability of the government to do anything for good or ill. Stock markets in Europe are taking a massive hit – 3-5% — and other world markets are down and likely to keep falling for the next week.
If Greece leaves the Euro-Zone, there will be profound ramifications for the Greek people who will likely see a fall in their standard of living – at least in the short term. Europe will see its dream diminished and may face other countries like Spain leaving as well. Countries that have been clamouring to get in may have second thoughts. Europe may have second thoughts about them.
Still, some countries have prospered while remaining on the outside or limiting their participation. The Nordic countries (3 are members while 2 are not) are doing fine. Iceland weathered its own financial crisis by taking an Europe-independent and radical approach. Britain (which may be emboldened to reconsider its role in Europe) has always maintained its separate currency. This has had mixed results but is unlikely to change.
A smaller Europe may be a more prosperous one and may be better able to deal with its current crises around refugees and immigration integration.
If we want a model of the long term results, they abound. In 2001, Argentina defaulted entirely on its debt. It took ten years for the Argentine economy to recover only to fall back into default by hedge fund managers’ lawsuits. Still, most people feel that the long term results were less calamitous than predicted. The Asian currency crisis of 1997 also had a tremendous local and short term impact on the effected economies but the region has bounced back to become a powerhouse in the global economy.
Unlike the depression of the 1930s, economic downturns in a global economy tend to be more frequent but shorter in duration and muted in impact. The interconnectedness that causes a Greek crisis to impact Canadian investors (unheard of before WWII) also cushions the impacts. Although globalization has had many negative effects, it has lent resilience to economic systems that prevent long-term local depressions which were common when countries were more isolationist and disconnected.
But that’s ten minutes.