Can We Learn Anything From Greece?

Greece is running out of money. Their bond holders are getting anxious. The EU is upset because the Euro is losing value as investors move into other currencies. Is this all a surprise? In short, no. The writing has been on the wall since before Greece’s inclusion into the EU. The questions are, what impact are the actions Greece is being forced to take going to have on their fragile economy and what can the US take away as a lesson from this situation?

Currently it is estimated that deficit spending in Greece  reached 12.7% of GDP in fiscal year 2009 (The US was about 10%). This is problematic for several reasons, first, it severely violates the 3% maximum EU restriction on deficit spending and second, Greece is hard pressed in the current economic crisis to adequately service this debt. This has bond holders worried that they will never be repaid and has turned away many new potential lenders and debt holders. This should not have been a surprise to anyone in Greece or anyone in the EU (who are suddenly crying foul) because Greece has had a problem controlling their spending since the day they entered the EU. In fact, in only one fiscal year have they managed to meet EU debt requirements (this however is contested since it has come to light that Greece failed to disclose a set of government expenditures and was counting EU aid to private organizations as revenue). Germany, the strongest economic member of the EU has flat out refused to give direct aid to Greece, fearing that this will set a dangerous precedent—even though they turned a blind eye to the massive deficit spending during the past 8 years. The only move in the playbook for Greece now is a move toward austerity. Greece will need to show that they can cut spending or raise taxes and be fiscally responsible before anyone one will loan them money at rates they can afford. Greece has proposed moves that will yield $6.6 through cuts and tax increases. A look at these measures shows drastic cuts to the salaries of public servants, their pensions, and their entitlements as well as two favorite tricks employed by governments: higher taxes on businesses and the rich.

What is the immediate impact of these measures? Protest! Long term affects? The taxes will most likely make them less competitive in the global marketplace and will also raise the cost of living, as companies push the cost of the new taxes onto the consumer in the form of higher prices. While raising taxes may provide a short term fix, it will ultimately cripple the economy by pushing business out. Good bye tax base. Cuts in spending are more likely to be effective, even if the cause protest, because they actually get to the heart of the problem: Greece is spending too much money. And the affect on the EU? The EU should not have let this debt and rule violation persist. The Euro is hitting new lows because of fear over one member state’s economy. Hopefully these measures will be enough to save face in the EU and provide enough stability to convince the Germans to buy Greek debt once again.

So, what can the US learn from this situation? Don’t spend more money than you have. Deficit spending is unsustainable. The Germans stopped buying Greek debt, how long until the Chinese stop buying ours? Also, are Germany and the EU right in driving such a hard line on Greece by refusing to give them aid or is this a step in the right direction of fiscal responsibility? Finally, what types of cuts/new taxes are fair? Regardless of opinion, I think the lesson at the end of the day is that spending more that you have and borrowing more than you can service is a disaster waiting to happen, just look at Iceland.


3 Responses

  1. Well when I was abroad and I was taking Eurobanking and Global Economics we covered a lot of this. The EU is very stubborn when it comes to fiscal policy. They have learned and now know that just giving more and more money isn’t a solution, but a short-term fix. My guess is they want Greece to either straighten itself out or request IMF aid. Both scenarios involve changes in economic policy to help the country become more stable. The only difference is in one case the country will create and implement the economic changes and in the other the IMF will do it. The IMF does conditional lending, which sets requirements for the country in order to borrow money. These conditions assist countries in establishing better economic policies and in time becoming more stable.
    On the comment about Iceland, it’s complicated. It’s true they were spending money they didn’t have, but it was because they made a futile attempt to rescue their banks. Regardless, it’s scary to think any government would allow themselves to become indebt 1000% more than their GDP. Way to go Iceland.

  2. I was about half way done with a post on Greece this week before I saw your article. Nice points, here are some other cool links you might want to take a look at:

    • I am not sure those links will work as Lexis-Nexis is behind a firewall. You may be better off giving him publication adn title and letting him find it through Lexis or through other means. But the sharing of ideas is AWESOME!

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