From NPR:
"There's no credit. How can you do business without credit?" he asks.
Greek banks have little money to lend out, while foreign lenders, which once flooded Greek businesses with loan offers, no longer want to do business in the country. The possibility that Greece might leave the eurozone, however slim, makes lending money there too risky.
It's a huge challenge for companies like Kir-Yianni, which have to import virtually all of the materials and equipment they use in their production. Kir-Yianni buys bottles from Italy, paper from Turkey, barrels from France and cork from Portugal.
What the NPR broadcast is describing, though it does not go into the economic details, is a phenomenon called Wicksellian Rot. Entrepreneurs in Greece are suffering from not having the money at hand to make their exchanges. This does not necessitate that what they are doing is economically unprofitable, indeed in the case of many it seems that they are plenty profitable, but that they suffer a want of physical money to complete their exchanges with other people. They know that they can make mutually beneficial trades with other people and they have done so in the past, but this exchange cannot be completed because of a lack of money. Thus parts of the Greek economy, which could otherwise be prosperous, are in a state of economic malaise due to a simple lack of cash.
The Euro is leaving Greece. As can be gathered from the broadcast, and which is corroborated by other reports, there is not enough Euros in Greece to fulfill the demand for money and so patterns of trade are grinding to a halt. This in turn is exacerbating the Greek economy as those few productive sectors in the economy are brought down as the Wicksellian rot brings down the economy. The natural process of this crisis is that capital will flee Greece into other parts of the world, and especially of the Euro-zone, until the overall price-level in Greece. This can be crudely shown with a basic supply-and-demand diagram, with the price-level on the ordinate and the quantity of money on the abscissa:
The right-ward sloping blue curve is the demand for money. It slopes that way because as the price level increases, each unit of cash will chase less goods hence to maintain their power to buy goods, in econ-speak their purchasing-power, people will demand more money. The purple line is the supply of money. It is vertical there because we shall assume here that the supply of money is endogenous, the product of the decisions of central-bankers and savers for reason outside of the model. Here, the initial price-level shown by the red dashed line no longer brings the demand and supply of money into equilibrium. Instead, the demand for money at that price-level exceeds the supply resulting in a large shortage of money whose effects we now see in Greece. The two can be brought back into equilibrium if the general price level in Greece decline by a process of systemic deflation; however, this is a process that has proved to be devastating for prosperity as shown by the British deflation of the 1920s after the Bank of England returned to the gold standard's pre-war parity even after half a decade of inflationary politices.
This can be avoided and there is a way to bring back monetary equilibrium without the price-level adjusting. This is possible if the Greek government were to expand the money supply as to bring it into equilibrium at the current price-level. This can be graphically represented as so:
Even though this would disturb the economy in its own ways, expanding the money supply would enable Greek entrepreneurs who have viable businesses to get the cash they need. In addition, since the Greek unit of money would have to decrease in value with respect to foreign monies, Greek goods would be less expensive than goods from other nations leading to a comparative advantage for Greek exports.
None of this is to happen soon, though. The Greek government has no control over their money and the nation is stuck in a union to the benefit of fiscally sound countries. Due to the loyalty of the EU to the idea of a united Europe and because the Euro is seen as an essential tenet of a united Europe, the Greek economy is simply left to go about the long process of deflation (while at the same time having to abide by austerity measures enforced by the EU). If Greece were to simply leave the Euro and adopt the Drachma, then Wicksellian rot could be avoided by expanding the money supply and the Greeks could use devaluation as a tool for getting out of the crisis.
In the short term, this is not to be for Eurocrats can continue to delude themselves that Greece can somehow remain in the Eurozone without loosing a decade of economic growth. In the long term, though, the Euro will leave Greece and the conditions of Wicksellian rot will worsen until finally the Greek government expands the money supply. What they use to initially expand the money supply may not be called Drachmas at first. They may very well be promises to pay Euros to the holders of the notes. However, they will be Drachmas in all but name and it is very likely that Greece will only formally sever its ties to the Euro after the informal ties had already cut themselves. This is all speculation, but what we can be certain of is that as long as Greece is in the Euro, there is no hope for the Greek economy. Until political hopes give way to economic reality, Wicksellian rot will worsen in Greece.
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