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The New Economy

Do indebted nations need their own Ash Wednesday, Lent?

After years of overspending, Greece and other heavily indebted nations need the sacrifice and budget discipline symbolized by Ash Wednesday and Lent.

By / February 17, 2010

Revelers in Galaxidi, Greece, celebrated the start of the beginning of orthodox Lent on Monday with a traditional "flour war." After years of overspending, the Greek government says it's moving to slash its budget deficit from 12.7 percent to 3 percent of GDP over three years.

Yiorgos Karahalis/Reuters

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For several governments around the world, Ash Wednesday isn't just a religious date for the beginning of Lent.

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It's the start of an economic reckoning after years of overspending.

The most obvious Ash Wednesday candidate is Greece. Facing a debt crisis, it is embarking on a dramatic campaign to slash its budget deficit from 12.7 percent to 3 percent over three years.

That's such a drastic cut that Greece will need outside help. On Tuesday, the council of European Union finance ministers discussed how the EU might help but also gave the government of George Papandreou one month to start making big budget cuts. Otherwise, it warned, the EU itself would have to impose budget discipline on Greece.

There are plenty of other developed nations who could face a similar crisis of confidence if investors get spooked by the size of their government debt. For the past several weeks, speculation has centered on Portugal and Spain.

Other Ash Wednesday candidates include Japan, whose debts are now nearly twice as big as the size of its annual economic output (197 percent debt to gross domestic product). (Click on the chart above.)

Of course, economists have predicted a Japanese debt crisis for decades and have been proven wrong so far.

Heavily indebted Iceland (143 percent debt to GDP) already had its debt crisis a year ago.

Other possibilities include: Italy (127 percent debt/GDP), Belgium (105 percent), France (92.5 percent), and the United States (92.4 percent).

Even if these countries avoid a debt crisis, it's likely they'll have to make sacrifices by accepting slower growth. Nations with debts of 90 percent or more of their GDP typically see their annual growth rates fall by 1 percentage point, according to a new study by University of Maryland economist Carmen Reinhart and Harvard economist Kenneth Rogoff.

So there is a reckoning for years of overspending. It may come in the form of severe budget cuts or through years of slow growth.

Either way, the historical record suggests that that reckoning can only be delayed, not put off.

Heavily indebted governments need an economic Lent of sacrifice and budget discipline. Do you think they can do it? Let us know on Twitter @CSMecon.

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