WASHINGTON, July 7, 2015 — Greek Prime Minister Alexis Tsipras labeled Sunday’s referendum rejecting austerity “a victory for democracy.”
A vote against the stringent economic conditions required by international lenders in exchange for financial assistance is technically a “democratic” victory, but it is also a loss for Greece. While the majority danced in the streets after the vote, Greek ATM machines were empty and the country teetered on the verge of collapse. Western Europe scowled, although they may be the true victors if the vote saves them from pouring more money into the bottomless pit that is Greece.
Greece is, of course, important to Greeks, but it is not a linchpin economy for the rest of the world. If it suffers economic collapse, it will result in no more than a mere whimper heard around the world. Even a temporary panic across the Eurozone would soon settle down as the ultimately minor implications of such an event become clear. Greece provides virtually no value-added products to the market. Instead, since the day it joined the European single currency, it has sucked valuable resources from its neighbors.
Greek leaders are shaking their fists and warning of Armageddon. They tell Europe that if Greece fails, the entire Eurozone will fall. Greece warns of FAD, Financially Assured Destruction, saying that if one domino of the Eurozone falls, the rest will follow.
Unfortunately for Greece, this is not the case. Greece is simply not economically important enough to ensure a FAD policy.
Compare the fallout of a Greek collapse to the implications of a U.S., Chinese or German financial failure. Any of those would cause a massive world-wide financial crisis. The final collapse of poor Greece would cause just a blip on the economic radar if it occurred.
Screaming headlines will continue to stoke fears about the political and economic consequences of a Grexit or a Greek collapse, but the bottom line will remain the same: Greece has very little to contribute to the world market. Because of that reality, Greece could soon lose its status as a high-income society, becoming at best a middle income society.
Even if Greece wins concessions from international financial institutions, these concessions will provide only temporary respite. Nothing is changing on the ground for Greece. It still has no unique products to sell, contributes no value-added to international markets. How will this country ever repay its debts, if nothing has changed?
Even if Greece leaves the euro zone and goes back to its former currency, the drachma, the money will have no value. Currency is backed by goods and services. The value of money depends on a nation’s good reputation and its government’s guarantee that its currency is a reliable medium of exchange. Currencies must be able to store value and be a good, divisible unit of account.
Would the drachma suddenly become a reliable currency, when Greek authorities have already demonstrated a willingness to cook the books and ignore sound economic policies? More likely, a new drachma will quickly become worthless. Nonetheless, politicians will vainly speak of having done everything to pay off the pensioners, ignoring the substantial fallout for everyone else.
Greece, it seems, was destined to fail when it belatedly adopted the single European currency and the standards and responsibilities that went along with it. Unless Greece makes massive changes to its political and economic system, any efforts to prop up its economy will be mere band aids applied to a gaping wound that cannot heal.