Greek deficit crisis holds lessons for US, others
Financial markets are alarmed by the public spending binge in Greece, causing a slide in the euro. The lesson is basic: Countries with high deficits, including the US, must get their fiscal house in order.
A modern Greek tragedy, based on that country’s self-inflicted fiscal woes, holds lessons for other nations with deep deficits – including the United States.Skip to next paragraph
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Not to slight the birthplace of Western civilization, but what’s unfolding in Athens right now wouldn’t be getting top global billing were it not for Greece’s connection to the euro currency. Along with 15 of the European Union’s 27 member nations, Greece belongs to the “euro zone,” and therefore its problems can turn into Europe’s problems.
One rule for countries that use the euro is that they’re not allowed to let their budget deficits grow larger than 3 percent of their national economies, as measured by gross domestic product (GDP). Some countries have slipped a little. Some a lot.
Greece is in the latter category, with its deficit more than four times what it’s supposed to be, or 12.7 percent of GDP in 2009 (by comparison, the US deficit is about 10 percent of the economy). Over the past decade, Athens turned government spending into an Olympian sport. It about doubled the wages of public-sector workers, for instance.
The overspending, along with chronic tax evasion and the fudging of federal accounting, have finally alarmed the financial markets. They worry Greece will default on its debt payments.That worry has roiled the bond markets and caused a slide in the value of the euro, which Greece’s fellow zonies are none too happy about.
Yes, a cheaper euro makes their exports less expensive to the rest of the buying world, but a slumping currency also means lower wages and slower economic growth – right when Europe is trying to recover from a severe recession.
This week, the European Union agreed to stand by Greece, but it was vague about how exactly it would help its Mediterranean member. Even as the EU offered support, it emphasized that Greece must take austerity measures. Indeed, Greece has a plan, including a freeze on public-sector wages, tax increases, and a higher retirement age to save its ailing pension system. The plan didn’t sit well with public workers, who recently took to the streets to protest.
The moral of the Greek drama is this: What can’t go on forever will eventually stop. The financial markets will, at some unknown point in time, wake up to nations – or companies – that can’t keep a tidy fiscal house. That’s what happened with Wall Street and the mortgage bubble in 2008. It’s what could happen if countries like Greece don’t do the hard work to rein in their deficits and make the long-term structural reforms that are needed to grow their economies.