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I want to make sure I understand why the economy of greece is so poor. It looks like one way trade to me. Back when, if greeks bought german products, then germans end up with greek currency which had to be used for greek products, services, tourism, etc. Now, greece buys german products, and germany gets euros which let’s them buy from france, or whoever, or simply just keep the money inside the country? Is this correct? Money just always flows away from greece so they must face a constant deflationary recession.

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Posted by laskerfan12
Posted on 03/30/2017 2:48 PM
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Greece has a couple of rough issues. First, the economy is simply not as productive as their northern European cousins. This is due to a ton of issues like under investment in important areas, lax worker policies, and an over reliance on industries like tourism. The effect of all of that, combined with losing monetary flexibility of running their own currency (not that the drachma was well managed, but that’s a topic for another day) has resulted in a rock & hard place scenario. Greece has a hard time servicing their euro denominated bonds in part because low taxation has been combined with very expensive social welfare programs. Greece’s tax rates actually aren’t that low, but historically has had abysmal compliance rates (bribing the tax man is commonplace, and has been for decades). If you don’t tax enough, and you don’t print your own currency, then you are left with selling bonds. In a nutshell that’s why Greece’s debt problems are so much worse than other European countries. The same dynamics that have led to Spain, Italy, and Portugal having a rough go are magnified in Greece, because at a minimum those countries ability to tax was more robust.
Greece (as well as the other southern euro countries) desperately need to devalue the currency. That’s the problem with seeding your monetary authority without more comprehensive fiscal union. The correct monetary policy for a country like Germany is completely different from what’s right for Greece. All that being said, abandoning the Euro would be a wildly costly and destructive process. The ensuing brain drain (already in progress), divestment of euro based multinationals, and capital market dislocations would incur significant costs. That’s the Rock and the Hard Place.

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Posted by advt
Answered on 03/30/2017 4:06 PM
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    > laskerfan10

    you are correct , with no exchange rate moderating the trade, money flows out of Greece for imports.

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    Posted by Dinero
    Answered on 03/31/2017 5:56 AM
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      “Werner-Proposal of 2011 (and 1996)
       Ireland, Portugal, Spain, Italy and Greece need to stimulate economic growth
       Their governments need to save money and reduce borrowing costs.
       Bank credit growth needs to expand and banks need a safe way to expand their business and their returns
       Here is how all of this can be achieved:
       Governments need to stop the issuance of government bonds
       Instead of borrowing from the bond markets – who do not create money – governments should fund their borrowing requirements entirely by borrowing from all the banks in their country.
      Werner-Proposal: The solution that maintains the euro and avoids default
       Governments should enter into 3-year loan contracts at the much lower prime borrowing rate.
       Eurozone governments remain zero risk borrowers according to the Basel capital adequacy framework (banks are thus happy to lend).
       The prime rate is close to the banks’ refinancing costs of 1% – say 3.5%.
       Instead of governments injecting money into banks, banks create new money and give it to the governments.
      Advantages of this Proposal  The proposal will not increase aggregate debt.  The incentive structure is right, as each country remains in charge of and liable for its debts. Thus e.g. Germany’s credit rating will not be damaged.  But it takes the monthly market pressure out of the picture: no more rising bond yields as old bonds mature, so also no further ECB intervention required or purchases by the EFSF, etc.  The immediate savings will be substantial, as this method of enhanced debt management reduces the new borrowing costs, even below post ECB-purchase yields (E 10bn in the coming year for Italy alone).
      Advantages (II)  This proposal addresses the core underlying problem: slowing growth and the need to stimulate it. The proposal will boost nominal GDP growth – and avoid crowding out from the bond markets.  This is a problem as tight fiscal policy and tight credit conditions slow growth, with bank credit shrinking: Germany (-0.1%), Greece (-3.5%), Spain (-0.5%), Ireland (-14%).  Bank credit extension adds to the money supply. From the credit model we know that the proposal will boost nominal GDP growth – and avoid crowding out from the bond markets.  This increases employment and tax revenues.  It can push countries back from the brink of a deflationary and contractionary downward spiral into a positive cycle of growth, greater tax revenues and falling debt/GDP. “

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      Posted by James Charles
      Answered on 03/31/2017 7:21 AM
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        These answers seem to have it all covered! Thanks guys.

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        Cullen Roche Posted by Cullen Roche
        Answered on 04/04/2017 7:08 AM
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          The pink elephant in the room is the sovereign debt. It’s important to understand that the PIIGS were not able to extinguish their local-currency denominated debt when they adopted the Euro. No, it all got converted at a 1:1 rate with the new Euro at .80. Well, what do you think happened as the Euro zoomed up to $1.60? That, in a nutshell, is crushing deflation.

          Greece doesn’t get a legal break because the “rich” and “racist” Northern countries such as Germany and France (and their crony NGO’s such as the IMF, WB, ECB) don’t want Greece to not pay for its previous sins (which is a pretty long list). So in the absence of any monetary policy to devalue the sovereign debt and currency as a pressure-relief valve, the chokehold of austerity will continue. Greece simply cannot be allowed to bargain or leave the EU because it will set off a domino effect for the other PIIGS indebted countries. There’s also the inconvenient truth that all the central banks of each EU member country all hold each other’s local sovereign debt — even if it is junk status as with PIIGS. The EU simply cannot allow any “mark to market” to happen, although at this point I think the ECB has effectively taken it all off each member’s central bank’s balance sheets — not sure.

          That’s not to say the PIIGS didn’t benefit from joining the Euro. They got instant access to low interest rates that reflected the North’s systemic risk, not country-local. So quite a lot of real estate speculation/mortgage lending and trans-national capital flows for banking/savings went on. And the free movement of people was a boon for Millennials to go to the North to get real jobs.

          Essentially, the EU wants a United State of Europe but were not willing to do what was needed to be done to make it feasible (and they were fully aware they needed to do it before the Euro but declined for political reasons aka the North didn’t want to appear to be bailing out the South)… i.e. common national Treasury debt and extinguishing previous local debts. So the EU is doomed to ultimate failure unless they can fix these fatal flaws.

          BTW, Brexit is an entirely different matter. They joined a trade union not a federal United States of Europe. All members joined the former, but the bureaucrats pulled a bait and switch.

          What’s really ironical about all this is that you never would believe how “pro-capitalist” the socialist North and their crony three-lettered NGO’s are being! Even Trump being elected has reflexively made them more pro-free trade. We’ll have to see if they walk the talk when it comes to Africa or if the usual colonial/imperial/racist policy of promoting Big Government still applies.

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          Posted by MachineGhost
          Answered on 04/11/2017 10:39 PM
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