The debt crisis in Greece is sadly becoming a human tragedy. Not only have people perished in protests against government austerity measures, but the entire population is likely looking ahead to a protracted period of reduced economic opportunity and welfare. That should be enough to make all of us care about what’s going on in Greece.
But on top of that, there are more selfish reasons to be concerned. Greece might seem a small country, far away, with little international influence. But the crisis in Greece is sending out ripple effects through the entire global economy that will impact everyone. And for the most part, not in positive ways.
First, the Greek debt crisis very likely means a slower recovery from the Great Recession. The rebound is picking up better than many economists had expected, especially in the U.S., but it’s still pretty weak, with unemployment at astronomically high levels in much of the developed world. The fallout from Greece will just be another drag on the recovery, one that could further dampen job creation.
The reason is that Europe is a major source of customers for the world’s stuff. For example, the EU is a bigger trading partner for China than the U.S. Due to the Greek crisis, the other indebted nations of the Eurozone will also come under pressure to rein in their fiscal spending, which is bad for demand, especially amid this anemic recovery. Consumers in those countries will also probably put off major purchases, due to an expectation of tax hikes and an uncertain economic environment. That means reduced exports from the rest of the world to Europe, and fewer jobs created as a result.
Secondly, the Greek crisis is altering the way money is flowing around the world. With investors jittery because of the debt crisis, there’s going to be a “flight to quality,” in which they shift funds from investments considered riskier. That has both positive and negative effects, depending on where you live. The U.S. will probably see a flow of money into dollar assets, which are traditionally perceived as “safer,” due in part to the fact that they are extremely liquid. That will make it easier for the U.S. to finance its own deficits. But it will also strengthen the dollar, which makes U.S. goods less competitive in world markets. That hurts exports, and thus possibly America’s own recovery. If you live in an emerging market, there’s a good chance you’ll see the flip side of the shift to dollars. Capital could flow out of your country, which might lead to declines in local stock prices.
Third, Greece could be a window into the future of other heavily indebted advanced economies. The Greek crisis has heightened investor concern about rising levels of government debt throughout the industrialized world. There is no way countries like the U.S. and Japan can continue to stack up fiscal deficits and sovereign debt indefinitely. Eventually, they’ll have to scale back, and implement austerity policies along the lines of what Greece is enduring. That doesn’t mean the U.S. will fall into a debt crisis, with mass violence on the streets. But the inevitable budget cuts will have implications for economic growth, government services and tax levels.
Yes, more happy happy news from Curious Capitalist!