The intertwined worlds of government and finance are swirling with drama not seen since the fall of Lehman Brothers in 2008. The epicenter of the current crisis is Greece. The Aegean nation’s sovereign debt has been downgraded to “junk” status while talk of outright default by the Greek government has arisen. The very survival of the euro—the 11-year-old currency used by Greeks and over 300 million other Europeans—has been brought into question.
Yields on the Greek government’s two-year notes have soared from 2.1 percent to 18.9 percent in the last few months, producing what one analyst termed “bond market Armageddon.” The Secretary General of the Organization for Economic Co-operation and Development (OECD) has likened the bond market panic to the Ebola virus; the head of the International Monetary Fund (IMF) has warned of “contagion”—the potential for Greece’s sovereign debt crisis to spread to other heavily indebted European states.
How did Greece get into this mess? The primary cause has been fiscal irresponsibility. Sovereign governments that join the European Union pledge to keep their budget deficits below 3 percent of GDP. Greece’s most recent deficit is estimated to be almost 14 percent. It didn’t get there in one year. It turns out they have been lying about their deficits for years, employing those financial bad boys at Goldman Sachs to devise devious schemes for disguising the extent of their deficits.
Greece’s total indebtedness approximates 120 percent of GDP. Combined with this year’s 14 percent deficit, such massive quantities of red ink suggest that Greece is essentially broke and its currency is due to take a tumble.
Here is where it gets complicated: Greece shares the euro with 15 (officially) or 20 (unofficially) other European countries. A devaluation of the euro makes no sense for European Union members with sounder fiscal policies. The inherent, perhaps fatal, flaw of the euro currency is that each member country pursues its own fiscal policies, some of which inevitably must be incompatible with the European Central Bank’s monetary policies.
Greece clearly needs to get its fiscal house in order if it is to regain financial credibility and stability. It lacks the political will to do so. Proposals to reduce government spending have caused Greek Air Force pilots to go on strike, anarchists and students to throw Molotov cocktails, and unions to call for a nationwide strike beginning May 5.
One raging debate has been whether Germany, the economically dominant European state, would bail out Greece. On the one hand, many Germans still resent the immense costs of re-integrating East Germans into the German economy after the dissolution of the Soviet bloc. If hard-working, industrious, fiscally disciplined Germans are fuming about helping their fellow Germans, who developed an entitlement mentality during their decades under socialism, they surely won’t want to bail out profligate Greeks.
Ah, but again there is a complicating factor: German banks, it turns out, own tens of billions of euros worth of Greece’s debts. Thus, German politicians are wrestling with the vexing question of whether they will incur greater voter wrath by bailing out undeserving Greek deadbeats or by doing nothing and possibly precipitating a major crisis in the German financial system.
Should Americans care about all this? Not long ago, the euro was being touted as a possible competitor with the dollar for global foreign currency reserves. Not today. But if you are tempted to gloat, here are two reasons why you shouldn’t:
1) We Americans have become a significant player in the stop-gap Greek bailout. That is because the IMF has been like the cavalry riding to the rescue, promising big bucks to the Greek government. Since the largest contributions to the IMF come from the American taxpayer, we find ourselves once again picking up the tab for a bailout—this time, not for rich American financiers (at least, not primarily, although JP Morgan and Morgan Stanley both have significant holdings of Greek debt), but for corrupt and profligate foreign governments and special interest groups.
2) Our own debt and deficit figures are not too far from being as parlous as Greece’s. At $1.6 trillion, this year’s federal debt is over 11 percent of our GDP, while our total (explicitly acknowledged) national debt is pushing the 90 percent-of-GDP threshold. Greece may be giving us a sneak peek at our own sovereign debt crisis in the not-so-distant future.
These are historic times. We may be at the beginning stages of a great unraveling of several widely believed political myths—that democratic governments can exercise sufficient fiscal restraint to preserve their ongoing financial viability; that unbacked paper currencies imposed by governments and central banks can provide a long-lasting, sound medium of exchange; that countries can’t go broke; and that government debt is a relatively safe investment.
The current Greek tragedy shows us that democratic welfare states, predicated on the belief that citizens have the right to live at the expense of fellow citizens, are economically untenable and inherently suicidal.