In this case, the Greeks are bearing an invaluable gift: a view of the future. The future they present is what happens when a government engages in unsustainable monetary and fiscal policies. Everyone knows that Greece, as a result of unsustainable practices, faced certain default on its obligations. In order to maintain the viability of the Euro, the European Community came to the rescue with a $159 Billion rescue package. The package did not come without strings. The first condition was inherent: Greece was no longer a sovereign nation. The second condition was that Greece engage in a severe program of government cuts and tax increases.
Two things became obvious almost immediately. First, the nature of the austerity programs caused violent rioting in the streets. Second, the austerity program was not enough. While the riots continued, all of the cuts did not provide any confidence in the success of Greece’s efforts. The Greek budget deficit is larger than originally thought and the spending cuts and increase in revenues are significantly deficient in meeting the obligations that have been imposed by the International Monetary Fund and the other members of the Euro Zone. There is little doubt that Greek default is a certainty unless there is another bailout. There is a problem with a bailout. The European Community is concerned about the inevitable need to provide support for Greece long into the future. Some of the Finance Ministers of the European countries are insisting that in addition to serious increases in the austerity programs, the Greek bond holders participate in the pain by bearing part of the cost of the bailout program. This means that bond holders will not receive the return on their investments or, in fact, the return of their initial investments. This debate has already caused the cost of bonds to the Greek government to soar to 30% for two-year bonds. Of course, the cost to the Greek government is now and will continue to be unsustainable. Greece will not be able to rely on borrowing to fund governmental expenditures. Further, having Greek bondholders take a haircut will send a negative message to all of the other countries currently being bailed out and those who are about to be bailed out.
What has happened in Greece has spread to Ireland and Portugal and has Spain and Italy in its sites. As is the case in Greece, the others receiving bail-out funds are not likely to meet the austerity goals imposed on them. This will create even greater pressure on Europe. Even those not anticipating default are facing significant challenges. Country-wide public sector strikes are promised in England.
What is very important about what is happening in Europe is that it could happen here. In fact, the crisis is here already. Further, the instability in Europe is contributing to the weakness in our economy. What is also important about what is happening in Europe is that we are not just spectators. We are involved. Our Fed has transferred $60 Billion to the European Central Bank which is being used to bail out European countries. Further, we are the largest contributor to the International Monetary Fund which is the major player in the bail out of these countries.
Those who look at what is happening in Europe and believe that these extreme events could not happen here should try to explain to themselves why not. Is there something inherently different between Greece and California? If both have pursued unsustainable governmental spending program and cannot meet their obligations, why should the result be different for one than the other. Actually, there is a major difference. The European Union has felt, to date, that they could not let Greece default. They bailed Greece out. California does not have anyone prepared to bail-out them out. We already see marches and somewhat violent demonstrations in the streets of many of our States. We are seeing state governments cut programs and employees. When will the response of the demonstrators be indistinguishable from what we see in Greece? If there are those who do not see this result as inevitable, they should be prepared to explain why, if only to themselves.
Is it different at the Federal level? The unsustainable programs and spending will necessarily lead to a default. Like the states, the Federal government cannot not look elsewhere to be bailed out. They can help themselves by printing more money. In fact, that is what they are doing now. The problem is that this effort will substantially devalue the dollar and not solve our problem. The federal government can also borrow money to meet its needs. Unfortunately, as everyone knows, our borrowing has resulted in a $14.3 Trillion debt and growing. Over 40 cents of every dollar we spend is borrowed. Is this sustainable? Of course not. Is it getting better? No! We are borrowing $1.6 Trillion each year.
Greece is our “mine canary.” What is happening in Greece in inevitable here unless we make significant changes in our spending programs. Time is running out. What are our leaders doing? Nothing. They are seeking to take political advantage of the position of their opponents. They are trying to find new ways of kicking the can down the road.
The Greeks have sent us a valuable gift. If only we could make good use of it.
