With a GDP of US$3.6 trillion, Germany is now the largest economy in Europe as well as the 4th largest economy in the world. Germany also has roughly $50 billion in estimated loans to Greece, a large amount, but not an overwhelmingly debilitating amount given the size of their economy. Saving Greece helps the Germans and the rest of the 27 EU members who in some way were all negatively affected by Germany decades ago.
GRAND STANDING AND FINGER WAGGING
Instead of taking this opportunity to save the world and make up for the atrocities of their past, Germany has decided to play politics, wagging their fingers violently at Greece for their complete, and utter mismanagement of their economy. Make no mistake, the Greek fiasco is a crisis of politics, and not of economics, yet.
To put it simply, Greece’s budget deficit in 2009 was 12.7 per cent of GDP, and its overall debt was 113.4 per cent of GDP. We’re talking one naughty, highly indebted country who spent way more than it earned for years and years and years. Even debt-addicted America only has a overall debt to GDP ratio of 88%, and we tried hard to mess up our economy!
How can Greece be so foolish in their spending one might ask? That’s easy, Greece knows their backstop is the European Union and politicians are to blame once again. A dirty politician is the same in every country. Politicians make promises they cannot keep, and spend more than they take in to get elected and feed their egos. Discipline is thrown out the window when it comes to being able to gorge on other people’s money and not your own. The empty promises are always the next politician’s problems!
When Greece gave up its Drachma currency in 2001, they did so unwillingly, but with the promises of a brighter future. With the might of 26 other member countries, many of whom are much larger such as Spain (4X bigger), it behooves Greece to live like Gods and spend like the wind. The problem lies in timing, and a complicated web of debt that creates knock-on effects for all countries.
THE REAL SOLUTION: GERMANY’S CHANCE OF A LIFETIME
For all those guilty German souls who feel bad their people pillaged much of Europe in the 1930s and 40s, now is the chance to improve their future legacy. Imagine if all the citizens of Germany came together and voted for their government to be the white knight and bailout out Greece all by themselves. Not only will the Greek be more forgiving of Germany, but so will every other European Union country perhaps. The Germans have a phenomenal opportunity to change perceptions and negative stereotypes held by millions.
Germans are suffering needlessly because of uncontrollable past events. If I were living in Germany, I’d vote for a Germany-lead bailout with pride. Maybe my future taxes get raised to pay for the bailout. Or maybe not, as the German government decides to raise taxes on only the top 10% of income earners like we do here in the US.
In any case, I’d vote with vigor because I’m sick of people looking at me funny and discriminating. Instead, politicians are playing the blame game and publicly trying to humiliate each other. I don’t want my kids to ever, ever suffer from what someone did 100 years ago. Chalk up $50-150 billion in German bailout money as unpaid interest of war reparations compounded over the past six decades. The amount will never eradicate the past but at least it’ll help their future.
THE WORLD STEPS IN INSTEAD
Concerned that the fiscal damage could spread throughout the EU and the world, EU members and the IMF have pledged $1 trillion ($750 billion up front, $300 million over the next 3 years) to bail out Greece, but most notably the Euro. And since the United States is the largest contributor to the IMF budget at 17%, our share of the $1 trillion IMF package could be as high as $40 billion bucks! That buys one heck a lot of spanikopita!
It’s safe to say that nobody knows exactly how much bailout money Greece needs, because it’s almost impossible to quantify the value of their debt to all their fellow European Union members. What is known is that the strongest members of the European Union like Germany, can easily provides a $50+ billion bailout package and save their brother. By not leading the charge, and letting the IMF and the US take control, Germany misses their oipportunity to make a difference. Worse, the world will wonder why the largest economy in Europe, with much to lose if Greece goes under, didn’t do more while others did.
The US sub-prime crisis teaches us that without a concerted bailout, we all suffer. We can blame Wall St. for creating exotic financial instruments which nobody understands. We can also blame homeowners who bought way more house than they knowingly could afford. But when crap hits the fan, we all get smeared, so we might as well all pitch in. Once the rescue package arrives, we then enforce stringent regulations and make hard admonitions against guilty parties in hopes a crisis never happens again. But rest assured, as long as humans exist, crises will happen.
Greece is to Bear Sterns what Spain is to Lehman. Greece should consider itself lucky it’s relatively small, and first to announce it has a debt problem. You know they will get bailed out, because The EU and the IMF can’t risk contagion. The problem is, once Greece gets bailed out, many of our Spanish friends might do a little more binge spending and say, “Nosotros tambien! Si, como no?“ One by one, the fear is that every single EU country with a little bit of debt takes advantage of moral hazard and stop paying. You thought The Moral Hazard of America was bad, you ain’t seen nothing yet!
Das Eisen schmieden, solange es heiß ist!
Readers, do you think Germany should lead the charge in bailing out Greece? If so, will it help change perceptions about their role in World War II?
Can we blame Greece for behaving badly? After all, they don’t have the Drachma to worry about anymore.
How big do you think this European debt crisis will become?
Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”
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