Are there lessons for the U.S. in Greece's debt crisis?

Friday, February 12, 2010

FROM THE INCEPTION of European monetary union, doubters have argued that it made no political or economic sense. How could one currency endure in such a diverse region -- especially when each constituent nation retained control over its own taxing, spending and borrowing? Now, thanks to the worst recession since the euro's birth in 1999, the predicted crisis has arrived: a bond market attack on Greece, whose government debt has hit about 130 percent of gross domestic product. Spain, Ireland, Portugal and Italy may soon find themselves in the same predicament.

As we write, some sort of German-led short-term bailout appears to be in the works. The Greek government has promised to slash its budget deficit from 12.7 percent of GDP to 3 percent by 2012, and it will probably take at least that much austerity to sell a rescue to a skeptical German public. Investors doubt that the Greek government can follow through in the face of strikes and protests, but polls show, encouragingly, that the Greek public is willing to swallow the bitter medicine. Still, the worry remains that Greece is to heavily indebted governments what Bear Stearns was to over-leveraged investment banks: the first domino.

The United States benefits in the short run, as flight from the euro strengthens the dollar and enables America to finance its own colossal borrowings more comfortably than would otherwise be the case. It would be a mistake to focus on this momentary fillip rather than the long-term implications of Europe's crisis. By effectively replacing their currencies at a puffed-up rate, the German-underwritten monetary union enabled Greece and other southern European countries, plus Ireland, to consume more than they produced. If this situation reminds you of the persistent imbalance between the high-consumption United States and China's export machine -- well, it should.

Unlike Greece, the United States prints the currency in which it borrows -- the dollar. And Greece, with a shadow economy equal to a quarter of GDP and notoriously phony government bookkeeping, presents an extreme case of fiscal profligacy. However, all nations live by the same economic laws. If the United States, too, persistently lives beyond its means, the global bond market may someday take revenge -- with all the risks to political stability and national sovereignty that would entail. Congress and President Obama should put the country back on a fiscally sustainable path now rather than wait for a crisis to force them into it.

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