Greek crisis: euro's too weak, dollar's too strong

“That was Greek to me.”  These words, written by Shakespeare in 1599, means something is too hard to understand.

Now, it applies to Greece itself.  What’s all the fuss about and does it matter to us?

The answer to the second question: your job could depend on how the Greek financial crisis is settled.  The answer to the first question reveals a high stakes story of the games countries play.

Greece financed both government and private sector expenses with a lot of borrowing to cover shortfalls in domestic taxes and company income.  In its most celebrated problem, the Greek  government turned a blind eye to tax evasion by the wealthy.

The country uses the euro as its currency.  The euro is the common currency of 19 member countries of the European Union.

But the euro does not work like the U.S. dollar, which is backed by the ability of the Congress to raise taxes to pay off federal debt.  The American currency is backed by the whole country. 

The euro’s strength depends on support from each participating country.  They pledge to keep their economies strong and avoid excessive debt, which in turns creates confidence in the common currency. 

Each country using the euro must report on the amount of public debt, but Greece intentionally filed false reports.  It borrowed much more than it should.

When it could not longer keep up with payments on its debt, Greece turned to other euro countries to be bailed out.  It asked for new loans from them to pay off older loans.

Here’s the key difference with the dollar.  In the U.S., the federal government raises its own funds and determines tax and money policies.  In the euro zone, each country acts independently.  Germany, as the richest country, must raise from its citizens a big chunk of what goes to Greece.

In return for new loans, Germany and others asked Greece to cut back on public spending, increase tax collection, trim pensions, and take other measures to reduce debt.  The International Monetary Fund also made loans to Greece with the same conditions.  The U.S. contributes 18 percent of IMF resources, so it has a stake in the crisis.

To obey the loan conditions, Greece cut spending back so far that it fell into a deep recession with high unemployment.  That made it even more difficult to repay its loans.  Now, it needs more bailout help to avoid defaulting on the first bailout loans.

The more it gets into debt and struggles to make payments through cutbacks harming its economy, the more Greece seems to be in a downward spiral.  As a result, it is really wants bailout funds that don’t have to be repaid.  Other countries and the IMF refuse and insist that Greece make tougher moves to put its house in order.

If this seemingly impossible situation cannot be resolved, Greece will default on its debt to European countries and the IMF.  Then, it would no longer use the euro as its currency – causing the so-called “grexit.”  It would return to its national currency, the drachma, worth little in international finance.

Because Greece is a relatively small country using the euro, the European currency would survive its departure.  But the world would have been put on clear notice that the euro is backed only by good intentions, not by mutual commitment.

The euro has taken on the characteristics of a true international currency, accepted in trade and 

finance as a so-called “reserve” currency.  The U.S. dollar has played that role for decades.  The grexit could cause a loss of confidence in the euro, making the dollar more valuable in world commerce. 

In fact, that has already begun to happen, and each euro equals fewer dollars.  The U.S. stock market seems befuddled by the twists of the Greek crisis story and swings with the latest news from Europe’s negotiations.

A “strong” dollar sounds better than it really is.  If the dollar becomes expensive in other currencies, meaning its takes more local currency to buy a dollar, American exports become more expensive in that currency. 

The U.S. wants and needs more jobs, and many will come from producing goods and services for export.  A stronger dollar not only will undermine efforts to create more export-related jobs, it can cost American jobs now dependent on sales abroad.

American industry and labor have a major stake in the Greek crisis and the euro’s revival.  For now, the U.S. waits on the sidelines as the crisis plays out.