Greek problem

Law and enforcement: wasting of government resources, government expenditure burgeons on a large parasite of public sector who employs far more people than necessary, creative accounting methods that literally suck the money from the government finance. Corruption and bribery, while revenue is jeopardized by  cheating people who avoid getting taxed.

Not punishable because the judiciary, the courts take 15 years to resolve a tax evasion case

1.       The tax system: rigged to enable the entire society to cheat on their taxes

e. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. Lacking faith in one another, they fall back on themselves and their families.

2.       Masking their low credibility by manipulating the systems

As a requirement to enter the Euro-zone, the Greeks had to meet national targets, to prove that they were capable of good European citizenship—that they would not, in the end, run up debts that other countries in the euro area would be forced to repay. In particular they needed to show budget deficits under 3 percent of their gross domestic product, and inflation running at roughly German levels. In 2000, after a flurry of statistical manipulation, Greece hit the targets. To lower the budget deficit the Greek government moved all sorts of expenses (pensions, defense expenditures) off the books. To lower Greek inflation the government did things like freeze prices for electricity and water and other government-supplied goods, and cut taxes on gas, alcohol, and tobacco. Greek-government statisticians did things like remove (high-priced) tomatoes from the consumer price index on the day inflation was measured.

3.       Deficits bound by artificially strong currency

Greeks may have the slightest intention to bring about a change, but they are too hand-tied to do so anyway: their artificially strong currency deprives them of a corrective mechanism to help reduce the deficit.

The exchange rate system is not free floating; therefore currency will not depreciate against foreign currencies, making the export just as expensive as before. There wouldn’t trade surplus or increased foreign direct investment.

The root of all evil: People and their characteristics

the problems that arose because different economies responded differently to the zone’s common monetary policy were underestimated. The sudden drop in real interest rates on joining the euro in Greece, Ireland and Spain fuelled huge spending booms. (Portugal had enjoyed its growth spurt in the late 1990s in anticipation of euro membership.) Rampant domestic demand pushed up unit-wage costs relative to those in the rest of the euro area, notably in Germany, hurting export competitiveness (see chart 2) and producing big current-account deficits.

the sceptics, the economies of the euro area are too diverse to live with the same money and too inflexible to adjust to imbalances when they arise.

Difference between US’s financial crisis and Europe’s government defaults.both are a result of indiscriminant and reckless borrowing. However, in the case of US, the indebted were the people, whereas in Europe, it was a number of countries: Greece and later Italy and Spain.

The US financial meltdown involves the issue of ethics because bankers knowingly lend out the money to people with low credibility and high risk of not being able to pay up. It is more of a deliberate pursuit of money than a careless calculation. In the case of Europe however, the default was a result of confidence: people having enough confidence about government bonds sold by the banks. The government finance themselves by borrowing from the people, with banks serving as the middle man who repackage government’s bonds and sold them off to the people. Confidence motivated the people to keep buying until suddenly, the confidence vanished and not being able to pay up the loans, both governments and banks are in danger of default.

However, the US case has no question about whether to bail out the bank or not, because it is in the interest of the government and nation to do so. However, in the case of the Euro-zone, more countries were involved and the case was more complicated: people in affluent countries have bought the bonds of less well-to-do governments through their own local banks, due to the inclusion of all euro-zone countries into a single market and financial services are made available to all regardless of boundaries. Even though rich countries such as Germany would want to protect its banks and the interest of its people, it is reluctant to bail out the indebted governments with its tax payers’ money. Therefore, the dilemma.

The Dilemma: German’s role

Germans may have economic interest to help the Greeks but such as move will not be politically justified; as the Germans were promised they would never need to bail out their fellow Europeans before entering the Euro-zone.

Will the Greek banks go

European central banks have bought any government bonds from banks that originated from Greek. 450billion worth of bonds. However,they do have their bottom line and that is not to buy any bonds rated as default by US agencies. If that were to happen the indebted governments and banks would have to repay the debts to E.C.B which will probably end up insolvent itself.

Germany: bring up the Credit rating of all Europeans countries since it sort of ruled the Euro-zone, allowing countries such as Greece, its people to enjoy cheap money to buy things they cannot afford. In a way, the Germans, through their bankers, used their own money to enable foreigners to behave insanely.

When there’s crisis, positive changes may well be resulted

Countries from troubled Portugal to well-off Germany have set out plans for cutting their budget deficits. Spain has embarked on reforms to free its notoriously rigid jobs market that would have seemed unthinkable a year earlier.

The solution

New rules to encourage fiscal discipline should help the euro area. They will reassure the bond-market vigilantes—and should come in handy if the vigilantes drop off again. Now would be a good time for national governments to adopt home-grown fiscal rules, as Germany already has

Broadly, there are three ways for a country to restore competitiveness: devaluation (which reduces wages relative to those in other exporting countries), wage cuts or higher productivity.

In the euro area, the first option is out. The other two rely on easing job-market rules so that pay matches workers’ efficiency more closely, and workers can move freely from dying industries and firms to growing ones. Governments also have to tackle the lack of competition in markets for goods and services, notably in non-tradables (eg, utilities), whose prices affect the costs of other firms, including exporters. A bigger push from Brussels to open services to greater cross-border competition might do far more good than more prescriptions about debts and deficits.

Adjustment by cutting wages is quite brutal, especially without the support of an expansionary fiscal policy. An alternative would be for competitive, trade-surplus countries, such as Germany and the Netherlands, to spend more: the combined deficits of the euro zone’s “periphery” are more or less offset by surpluses at the zone’s “core” .John Maynard Keynes believed that in a fixed exchange-rate system, the burden of adjustment to trade imbalances should fall equally on deficit and surplus countries. So he proposed that excess trade surpluses should be taxed.A scheme such as this would not be easy to implement: it would be hard to gauge the point at which the saving surpluses of an ageing country like Germany become harmful. But such a proposal would at least put “creditor adjustment” on the agenda.