Commentary: The drachma is among the oldest coins, dating back to the 6th century BC. And in 1832, it became the monetary unit of modern Greece. This ancient and glorious history came to an end in 2002, when it was replaced by the Euro. That event, the end of the drachma, has turned out to be a disaster for Greece.
Greek economy is among the countries suffering the greatest adverse effects from the 2008 Financial Panic and the subsequent Great Recession. Incomes have fallen by a quarter since then and the country has seen an out migration as especially young well-educated workers have sought employment in more prosperous parts of the EU. (Sound familiar New Mexico?)
Back in 2008, the standard response to a crisis like that faced by Greece would have been a devaluation of the currency, essentially putting the economy on fire sale. Increased demand for Greek exports would create jobs and put Greek workers back to work. But of course, this option was not available because Greece no longer had its own currency. The inability to devalue explains why Greece has not been able to recover.
The alternative to a currency depreciation would be fiscal expenditure to stimulate the economy. In the United States, for example, the $831 billion Obama Stimulus package is widely credit for the relatively rapid recovery of the U.S. economy.
A fiscal stimulus was not an option for Greece. The Financial Crisis plunged Greece into a sovereign debt crisis forcing a series of austerity measures resulting in a sharp decline government spending. This situation was made far worse when it was revealed that the Greek government had been systematically underreporting its debt so as to comply with EU monetary union guidelines.
In the alternative, Europe could have stepped up to bailout Greece, but this was not possible due to a lack of pollical support from Germany. Ultimately, Greece was bailed out with a $150 billion loan primarily funded by the IMF.
Greece has still not recovered from the 2008 Financial Crisis and is suffering the longest recession ever experienced by any developed country since the advent of modern economic statistics in the 1930s. Meanwhile other countries that also suffered disproportionately from the Great Recession—Portugal, Ireland, Spain and Italy—have recovered and returned to a growth path.
What are the lessons learned from the Greek situation? First is that monetary and fiscal tools can be used effectively to reduce the damage from financial crisis, and when these tools are not available, as in the case of Greece, the consequences can be dire. Second is that debt can make the situation much worse.
In the United States, unlike Europe, we have a unified fiscal regime. The federal government has substantial taxing capacity and funds nationwide programs that benefit the citizens of the United States without regard to state residence.
In the event of a turn down, such as the Great Recession, expenditure on these programs often increase automatically. For example, federally subsidize unemployment benefits increase in response to rising unemployment rates. The expenditure is exactly in the state where the problem is greatest. Europe does not have similar programs, at least not to the extent of the United States.
Monetary union without fiscal union is the reason for the Greek situation.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He has taught money and banking more than 100 times over 35 years. The opinions expressed may not be share by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.