Greece’s lessons for us
Greece’s financial crisis recalls the folly of American home buyers who took out subprime loans to buy houses they couldn’t afford, only to be stuck with a crushing debt when the real estate market collapsed. Thanks to a $146-billion bailout from other European countries and the International Monetary Fund, Greece won’t be defaulting — at least not right away. But the aid package may just be the first in a series to bring the Eurozone back to financial health. And although the details differ, the outlines of Greece’s woes are troublingly familiar.
Greece dug itself into a deep hole over the past decade, abetted by low interest rates and willing lenders. The government provided jobs and generous pensions to about one-quarter of the workforce, sacrificing productivity for social stability. After a recession sent the country’s deficit soaring, lenders started to balk at the government’s demand for credit, pushing Greece toward default. Over the weekend, European finance ministers reluctantly joined the IMF in making $146 billion in loans available for three years — far more than previously promised. Yet investors remained nervous about the rescue failing and the crisis spreading to other debt-laden countries.
The clearest winners, at least in the short term, are the banks in Greece, Germany, France and elsewhere in Europe, whose outstanding loans to the Greek government will be protected from default. The losers, meanwhile, are government workers and consumers in Greece, who will bear the brunt of the benefit cuts and tax increases designed to slash the country’s deficit. They’re not going along quietly; government workers have staged a series of debilitating protests, with a general strike scheduled for Wednesday.
The U.S. budget deficit and debt aren’t up to Athenian levels. But like Greece, the U.S. government has committed to providing benefits that it cannot afford over the long term. Policymakers have seen the problems in Social Security and Medicare coming for years, but Congress has done little about them. If anything, lawmakers made the task more difficult with this year’s healthcare reform law, which trimmed Medicare spending but dedicated the savings to a new healthcare insurance program for the working class.
Similarly, state and local governments in California face a growing threat from public employee pension programs that have multibillion-dollar shortfalls. The state also is saddled with a tax system that, although not subject to the rampant evasion that plagues Greece, is still a poor fit for the California’s economy. Sacramento and Washington aren’t cutting spending while the economy is still underperforming, but that shouldn’t stop policymakers from working now to head off the kind of structural problems that pushed Greece to the brink.
