Europe on the road to disaster, experts warn
Europe has just approved another €12 billion loan to rescue debt-stricken Greece. Analysts think the country will default, and could push the world economy into a catastrophic depression.
Economists and financial analysts have been studying the omens, and the omens are bad. Greece is in tumult, its economy crashing and its people in violent revolt against harsh austerity measures which are meant to save the day. Meanwhile, European leaders bicker among themselves. They are desperate to avoid a total Greek collapse, but are unable to offer the financial help that is needed for fear of the reaction of their taxpayers. It is the taxpayers, after all, who would ultimately foot the bill.
So, when they offered this latest package of financial assistance, Europe's politicians insisted that Greece make further cuts to government spending. That makes foreign taxpayers feel like the Greeks are taking their fair share of the punishment, but cuts are bad news for Greece's economy, which is already in dire condition. If the Greek economy doesn't grow, the country's debt will never be repaid, and before we know it, the government will be seeking another handout.
So what happens next? Analysts for private banks are betting on a default. They think Greece will declare itself bankrupt and refuse to pay some or even all of its debt. Greek citizens would be pleased: they are paying millions just in interest fees. Why pay, many are asking, when we could just default and get rid of the burden.
But the country would still be in trouble. It would have to leave the European single currency – something that would have been unthinkable two years ago. The whole European project of financial and political integration could hit the rocks.
And the banks who've been lending money to Greece would be devastated. Banks across Europe have been promised billions by Greece – if the country defaults, those promises suddenly become worthless. Some banks would probably go bust.
Road to perdition
The signs from the financial markets are that it's not a question of if, but when. One way to save Greece from a default now would be a huge-scale aid programme, binding the failing Greek economy to the strong economies of Northern Europe. But Northern voters aren't willing to make that commitment.
In that case, we may be sleepwalking into a catastrophe. The last economic crisis – the effects of which are still being felt – was triggered by the collapse of Lehman Brothers, a single merchant bank. What happens when it's not a bank that collapses but an entire country?
The world is at a crossroads: pay billions to save Greece or risk the consequences if it falls. At the moment, we stand, dithering, in the middle.
- Why should other European countries help Greece?
- Saving Greece might mean bringing Europe into closer political union. Would it be a good thing for Europe to turn into a single unified super-state?
- The biggest financial crisis of the 20th Century was the Wall Street Crash of 1929. Do some further research and write a brief report on the consequences and whether there are lessons for today.
- If Greece goes bust, it could unleash a destructive chain reaction through the world economy. Draw a chart tracing as many different consequences as you can.
Some People Say...
“Let the banks go bust. Bankers are to blame for this whole mess anyway.”
What do you think?
Q & A
- So what's the worst case scenario?
- At worst, a Greek default makes those banks which lent Greece money go bust. It then makes borrowing harder for other struggling countries, as bankers fear that they will default too.
- And would other countries default?
- If Greece does then others are more likely to follow. If they don't default they'll have to pay crippling interest fees. Meanwhile, if banks go bust, the financial sector could panic.
- What happens then?
- Banks stop lending, which means businesses can't get investment and start to go bankrupt. When businesses fail, people lose their jobs, which means they buy less, which in turn means that more businesses fail and economies shrink, which pushes governments into more debt.
- Will all that really happen?
- No one knows for sure – but no one is keen to find out.
- In many ancient cultures, people believed you could tell the future by studying 'omens', or signs sent by the gods.
- Austerity measures
- Austerity measures are often imposed as a condition of emergency loans. They aim at cutting government spending and increasing revenues.
- Financial analysts don't literally make bets, but they buy and sell complicated financial instruments which increase in value when one thing happens (like a Greek collapse) and decrease in value when another thing happens (like a Greek bailout). By looking at what financiers are buying, you can tell what they think is going to happen.
- Interest fees
- Interest fees are the charges you pay when you borrow money. The less likely you are to pay back a loan, the higher the interest fees become.
- A default happens when a person or entity can't or won't pay their debts.