Greek Calamity

The Real Greek Tragedy
Robert J. Samuelson - Newsweek

It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues that affect hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency, the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, and aged. All face similar problems: burgeoning costs as populations age, an overreliance on debt financing, and pressures to reduce borrowing that create parallel pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece seems the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt—basically, the sum of past annual deficits—was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost €17 billion of bonds (about $23 billion) maturing in April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal, and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are now debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others.

But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand—or require—rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut government workers and to raise taxes on alcohol, tobacco, and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble.

To some economists, the dire situation makes default inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen the existing unemployment rate of about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and might revert to its old currency (the drachma).

Conceived as a way to unite Europe, the euro increasingly fosters conflict. No one wants Greece to default, but no one wants to pay the price of prevention. With its own currency, Lachman thinks, Greece will pursue depreciation to spur exports and economic revival. If other countries dump the euro, currency wars could ensue. But the threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birthrate and a rapidly graying population automatically increase old-age assistance even as the government tries to cut total spending. At issue is the viability of its present welfare state.

Almost every advanced country—the United States, Britain, Germany, Italy, France, Japan, Belgium, and others—faces some combination of huge budget deficits, high debts, aging populations, and political paralysis. It's an unstable mix. The unpleasant choices now confronting Greece await most wealthy nations, even if they pretend otherwise.

Robert Samuelson is also the author of The Great Inflation and Its Aftermath: The Past and Future of American Affluence and Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong.