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Greece might offer different lessons than US budget hawks think it does.
ATHENS, Greece ― Just look at what happened to Greece.
Budget hawks in the United States keep this reminder at the ready as they argue for slashing the federal deficit. Rep. Paul D. Ryan (R-Wisc.) has even shown media clips of violent demonstrations in Athens to nursing homes in Wisconsin as part of his argument for budget cuts.
Congress has been in funding gridlock for weeks with the Republican-controlled House demanding $61 billion in budget cuts (including de-funding health care reform) and the Democratic-controlled Senate proposing far less drastic cuts. Neither side’s plan puts much of a dent in America’s $1.3 trillion deficit.
While Americans worry about a Greek-style debt crisis, Greeks have been following Washington’s budget battle ― and they feel the world should be more concerned about a U.S. default than the plight of their own small country. After all, at the moment, the United States has a higher budget deficit as a percentage of GDP than Greece (10 percent versus 9 percent). But the amount of the U.S. deficit is much larger.
“If the U.S. gets into deep, deep trouble, the rest of humanity is to follow,” said one academic who declined to be named since he felt he was just stating the obvious, not his own research. A series of economists and political analysts echoed the same.
A year ago, as the Greek crisis crested, a number of media outlets identified lessons for the future. (See here, here and here.) Here is a different set of lessons from Greece to the United States, with the benefit of hindsight.
1. Don’t Panic
Or rather, don’t cause a panic.
Whatever the reason Greece came clean about its budget deficit ― necessity or naivete? ― the announcement went horribly wrong. When the month-old socialist government revealed on Nov. 5, 2009 that the country’s budget deficit was 12.4 percent of GDP, more than double the already-revised 5.9 percent, it opened the gates of fiscal hell.
(And by 12.4 the Greeks meant 15.1, a European statistics review later found.)
It didn’t matter that the United Kingdom had a larger budget deficit or even that Ireland’s deficit would skyrocket to 32 percent of GDP. Greece had been cooking the books for years and it would take months to sort out how badly. In the meantime, Greece’s bond rating dropped while its spreads, and those for three others of the so-called PIIGS ― Portugal, Ireland and Spain ― shot past 10 percentage points.
Jens Bastian, an economic analyst with the Athens-based Hellenic Foundation for European and Foreign Policy (ELIAMEP), says American policy-makers should not merely avoid spooking the bond markets but consider how they will communicate in the event of a crisis of credibility. “It takes message discipline and coherence,” Bastian said.
2. Act Sooner Rather than Later
"As Benjamin Franklin once said," Bastian continued. "Time is money."
Greece chose to cover-up its debt for years instead of making tough political choices. The European Union looked the other way and then both sides hesitated for months when Greece came looking for help in early 2010. When the process started, it was unthinkable that the Europeans would turn to the International Monetary Fund, now supplying a third of Greece’s bailout.
"The euro zone’s lost time increased the cost of bailing out countries," Bastian said. "If you need to do something, don’t delay it. Don’t use national pride or prestige as an argument to avoid the hard choices."
3. No One Can Borrow Forever
Many politicians and economists point out that the interest on U.S. Treasury notes has never been cheaper. Fair enough.
But that argument is eerily similar to one made by current Greek Prime Minister George Papandreou during his 2009 election campaign, just months before his government dropped the bomb. Greece had been borrowing at record-low rates until the shock set in.
With a $1.5 trillion deficit, even a return to “normal” rates will have tremendous costs. To draw a parallel, American borrowing is like a credit card with a lengthy introductory APR but eventually you have to pay the balance. How long can the United States get away with this privilege of loose fiscal policy and low interest rates?
“China and other emerging markets have huge U.S. dollar holdings,” said Zsolt Darvas of Brueghel, a Brussels-based economic research institute. “They realize it is not good to be over-exposed to U.S. debt but if they try to diversify abruptly, the dollar will fall and they will incur huge losses.”
The United States might be able to thank Greece, in part, for its cheap borrowing: 30-year treasury bonds went into free fall in late April/early May 2010 at the height of the markets’ European debt jitters.
4. Anything can happen
World events can dramatically change the economic landscape.
Greece did not anticipate the global financial crisis and a government collapse that precipitated its crisis. Few people would have predicted the people of Egypt and Tunisia would throw out their rulers. Japan did not see the trifecta of earthquake, tsunami and nuclear catastrophe coming.
Then again, America’s culture of innovation may produce the next massive growth industry that will change everything.
There are no clear and present dangers, but, “the U.S. cannot be complacent,” Darvas said. “The U.S. should have a credible plan for fiscal consolidation.”
5. Look local
It may be the individual states, cities and towns in America that run into trouble before the federal government does ― and their GDP’s are closer to Greece’s in size. Greece’s lenders have been quick to applaud how aggressively the country cut down its national deficit. But in 2011, Greece has found it much more difficult to clean up inefficiency and graft in its health system and local government.
“The U.S. has to get its municipal bond market in order,” said Bastian, the Athens-based economist, citing recent investor skittishness. “If they retreat from the bond markets, that is a vote of no-confidence.”
States from Rhode Island to California have been waging annual budget battles against chronic deficits, cutting off aid to cities and towns and forcing higher property taxes and debts at the local level. There unions have taken to Greece-like, if less than violent, street politics to protect wages and benefits.
With the possible exception of Wisconsin, strikes and demonstrations are still far fewer, smaller and more rare in the United States than in Greece.
“The Greeks complain about everything,” Darvas said. “Americans have a tendency to just keep working.”
The United States might be able to come up with a mechanism to help states in crisis, as the EU has. But who can help the United States?
“The IMF cannot rescue the U.S.,” Darvas said. “The U.S. cannot count on external help.”
Unlike Greece, nobody can come to America’s rescue.