Greece is in crisis. Recent reports have shown rioting and told of the bombing deaths of Greek bank employees. For most Americans, the reports from Greece probably come as a shock. What happened to Greece and how did they get into this situation?
Greece certainly suffered from the global economic downturn that began in 2008, but its problems began long before that. In simple terms, Greece spent too much money. Like other social democracies, much of the money went to government salaries, pensions, and welfare state programs. By some estimates, government workers account for as much as 40% of the Greek economy [http://bit.ly/9dxUHB]. These government workers earn lavish salaries (they are paid for 14 months of work each year) and pensions. The Greek economy is also slowed by high levels of corruption, nepotism and tax evasion. Further, Greece also hosted the 2004 Olympic Games in Athens. The Olympics is always an expensive, and usually money-losing, proposition for the host country.
In the past, when Greece or other countries ran up high levels of debt, they would simply print more of the national currency. This would devalue the currency, the drachma in this case, and cause inflation. The government would then pay its debts in cheaper drachmas and repeat the cycle.
This changed in 2001 when Greece joined the euro zone and adopted the euro as its national currency. The more stable euro allowed Greece to finance its spending with lower interest rates and the country ran deficits to pay for its expensive public sector workers.
It wasn’t long before Greece began to have problems. Rules for the European Union specify that member nations are not permitted to run deficits larger than 3% of GDP (gross domestic product) [http://bit.ly/9Xxgsb ]. However, in 2004 it was revealed that Greece’s deficits had not been below 3% of GDP since before 1999. How did they manage to join the EU with larger deficits? They lied [http://bit.ly/cEXepN].
At that point, Greek voters ousted the socialists and installed a right-wing government in an attempt to restore fiscal sanity. The new government raised taxes on alcohol and tobacco, as well as increasing the VAT (value added tax) and, for a time, the Greek economy appeared to improve [http://bit.ly/cEXepN].
The next bill began to come due in 2008 with the crash of the global economy. As with most of the rest of the world, the Greek economy entered a recession. As the economy shrank, the deficit increased as a percentage of GDP. To make matters worse, the national debt had also increased by approximately 100 billion euros since 2004. The socialists returned to power in 2009 and announced sharp cuts to government spending to combat the crisis [http://bit.ly/5IkjZA].
It wasn’t enough. Greek bond ratings were revised downward and the Greek deficit for 2009, which had been estimated at 6%, was revealed to be as high as 13.6% as history repeated itself and Greek financial reports to the EU turned out to be less than accurate [http://huff.to/9euNoD]. Greek bonds soon reached junk bond status.
The Greek government imposed an austerity package of spending cuts and higher taxes on the nation. As a result, government union workers and anarchists opposed to multinational corporations began rioting in the streets. Three bank employees were killed when their bank was firebombed by rioters.
At this point, it appears that other European nations and the International Monetary Fund (IMF) will have to bail out Greece to prevent a national bankruptcy. According to the most recent reports, the EU and the IMF plan to loan Greece an additional $145 billion, of which $39 billion will be supplied by the IMF [ http://bit.ly/9sLtRM]. Some of the IMF money will be supplied by the United States.
Part of the danger of the Greek debt crisis is that it could spread to other parts of the EU and from there to the world. Other EU nations such as Spain, Portugal, and Italy also have debt crises, although not to the extent of the Greeks. Greek debt is worth approximately $400 billion and a default could cause a domino effect on banks, companies, and nations around the world [http://bit.ly/9Xxgsb]. Additionally, the crisis is already shaking investor confidence in the euro, causing its value, as well as stock markets around the world, to decline.
Many analysts are also pointing out that Greece might be a “canary in the coal mine” for many other western nations. The recession has caused many nations to run up deficits as they attempt to stimulate their national economies. Around the world, countries are finding that they can no longer afford expensive social programs and lavish salaries for public workers. As European research institute GaveKal noted, “If Greece was the birthplace of democracy, the question now is whether it will be the graveyard of social democracy” [http://bit.ly/9aVNzu].
The total Greek debt is now estimated to be at approximately 125% GDP [http://bit.ly/cD5ghY]. That means that Greece owes more than it can produce in one and one-fourth years. The Greek deficit is currently estimated at 13.6% GDP.
How does that contrast with the United States? The US debt is at 87.3% GDP and will soon reach 90%, the point at which the debt’s drag on the economy will increase markedly [http://bit.ly/c7EuJM]. The US is not far behind Greece in budget deficits. The federal budget deficit for 2009 was 9.9% [http://bit.ly/4riOem]. Given the spending habits of the current administration and congress, the US deficit and debt are both likely to continue increasing. As the numbers of federal employees increase, along with increasing federal pay rates and generous government pensions, the US is headed down the Greek road.
The US does enjoy several advantages over Greece. One is that US debt ratings are still good enough to garner low interest rates. There have been indications, however, that the US is in danger of being downgraded to a riskier status. Additionally, the US controls its own money supply. Unlike Greece, the US can print more money to pay its debts, although this would result in inflation (devalued and cheaper dollars).
The situation is different for many of the states, however. California, one of the leading basket case economies in the US, bears a striking resemblance to Greece. California is plagued by expensive government employee wages and pensions as well as costly social services. Government employee unions resist attempts to cut spending. Nevertheless, in 2009 California passed its own “austerity package” of tax hikes and spending cuts after it was forced to resort to paying state debts with IOUs. Like Greece, California also cannot manipulate its money supply since it uses the dollar. California’s 2010 budget shortfall was 56% of its total budget [http://bit.ly/5GfiaO]. If the situation does not improve, California may ultimately face the stark choice of begging for a federal bailout or a state bankruptcy.
In our own state of Georgia, we have also been hit hard by the economy. Georgia faces a budget deficit and shortfall as well. Georgia’s estimated budget shortfall for 2010 is 26% of the general budget. The state government is enacting deep budget cuts in education, transportation and health care.
Faced with a huge financial crisis, the states are adopting the Greek method of austerity measures while also relying on assistance from the federal government. In contrast, the federal government continues to grow and spend at a rate that dwarfs historical precedent. Ultimately, the bills will also come due to the federal government and the nation will face the painful realization that nothing is for free, including government services.
May 10, 2010