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Greek (Debt) Myths

by Elaine Schwartz    •    Jan 26, 2012    •    312 Views

Maybe sell some islands and an ancient ruin or two?

In Boomerang, Blind Side author Michael Lewis repeats what German politicians were suggesting in 2009 when they heard that the Greek debt was much larger than previous estimates. How much bigger? No one was really sure.

In a wonderful podcast, NPR’s This American Life explains that once Greece joined the European Monetary Union, it enjoyed a new world of credit. With fellow euro zone member Germany perceived as “the rich uncle” to (theoretically) back all loans, Greece’s interest rates plunged. Borrowing more cheaply meant the Greek government could borrow much more. Consumers who never had car loans or home mortgages suddenly found bankers welcoming them with rates that declined from 18% to 4%.

Lewis explains that Greek statisticians had to eliminate the high-priced tomatoes from their CPI to take their inflation rate within euro zone parameters. NPR’s reporters tell how Germany, hoping to expand the market for their goods, initially supported Greece’s euro zone entry. Getting what they wished for, more Greeks were buying Mercedes.

Our bottom line? Incentives. Isn’t everyone responding predictably? You might want to read This Times It’s Different for an academic explanation.

The Economic Lesson

In his America and the New Global Economy Teaching Company course, Professor Timothy Taylor explains why the Europeans wanted a common market. Assume for a moment that you own a factory and start exporting goods to a nearby country. You have to wait at the border and have your trucks approved by customs. You have to be sure that you comply with their product safety laws. You need to use their currency. 

Dr. Taylor says that with a common market you could enjoy the benefits of the 4 freedoms: 1) People, 2) Goods and services, 3) Labor, 4) Capital. The benefits of a European common market included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

An Econmic Question: How does the United States enjoy the common market benefits  listed by Dr. Taylor?

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