“It’s all Greek to me” is what students often say when they hear economists attempting to explain a situation in the economy or financial markets using all the associated economic jargon. These past few weeks the source of financial and economic complexity is Greece itself.
The value of the euro relative to the U.S. dollar has fallen dramatically this week. Euro selling pressure developed because investors remain skeptical that European leaders will come up with a way to aid Greece.
The government in Athens overextended itself, running excessive budget deficits for a number of years now, and according to a report in the Financial Times this week has 56 billion in short-term obligations. The report cites analysts’ predictions that any bailout plan for Greece will require help from the International Monetary Fund. The other European nations do not have the wherewithal to solve this problem on their own.
The problem is spreading. The debt-rating agency Fitch Inc. announced this week that it is cutting Portugal’s credit rating. The problem of heavy indebtedness plagues many smaller countries but appears particularly problematic in the developing nations that have adopted the single euro currency.
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So what does a Greek problem mean for our markets at home? Like it or not, Idaho businesses, consumers, and investors alike are affected by markets halfway around the world. The fall in the value of the euro corresponds with a rally in the value of the dollar as well as declines in both commodity and world stock prices.
The U.S. dollar currently buys about 1.34 euros. The euro’s value has dropped 12 percent since December. Much of the increased demand for dollars relative to the euro means higher demand for U.S. Treasuries.
In times of fiscal or debt crisis like those of Greece or Portugal, global investors move their capital to the relative safety of U.S. government debt. Prices for the U.S. Treasury 10-year note rose this week, reducing the interest rate.
The stronger value of the dollar also means dollar-denominated commodities are cheaper. This week the Reuters-Jefferies CRB index (an index that tracks a wide variety of commodities) fell 1 percent. Oil and gold prices are also lower.
Lower interest rates are a positive for businesses trying to grow or consumers hoping to keep their home financing costs low. But excessive government debt levels and the declining value of the non-U.S. currencies mean economic growth around the world will be lower than expected.
In report released earlier this month, Theo Janse Van Rensburg of the International Monetary Fund found that Europe and Central Asia countries are likely to see very low economic growth. He writes that “as financial markets continue to assess the (relative) sustainability of debt and deficits around the globe, ongoing uncertainty will hamper recovery.”
This is bad news for Idaho and the U.S. when an emphasis on export-led economic growth is dominating current policy. In his January State of the Union address, President Obama announced a goal of doubling exports over the next five years. This so called National Export Initiative will supposedly support two million jobs.
Deputy United States Trade Representative Demetrios Marantis met with business leaders in Pennsylvania this week and offered some idea of what this plan will do. "In keeping with the National Export Initiative, USTR is redoubling our trade efforts, and we are partnering across the federal government to ensure those efforts have a maximum impact for American businesses and workers,” Marantis said. “In short, USTR is pursuing a broad-based trade strategy that supports job creation by helping more American businesses to sell more goods and services in more places around the world."
Such efforts are clearly welcome, as many Idaho companies are seeking new markets for their goods. But slower growth and lower prices for many products will counteract any of these efforts.
Governments around the world have to get their budgets in order if prices are to stabilize and economic growth to pick up. The cases of Greece and Portugal illustrate how excessive budget deficits deter economic growth.
It’s all Greek to us.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.