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America is no Greece -- for now

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By Fareed Zakaria
Monday, May 24, 2010

Everyone seems to agree that America is in bad shape these days. The recent elections have been interpreted as more evidence of the public's anger. Large majorities continue to believe that we are on the "wrong track." Commentators and business leaders are almost unanimous in fretting about deficits and debt. Comparisons between America and Greece abound.

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Meanwhile, evidence mounts that the United States has emerged from the financial crisis of 2008 in better condition than anyone predicted 18 months ago. The economy is surprising most forecasters with growth across the board, much of it now led by the private sector. In the first four months of this year, companies have hired half a million people. Exports are up 20 percent over the same period last year. (Exports to China are up 50 percent.) The consensus forecast for this year's growth is edging up to 3.5 percent, and many economists believe that it could go higher. Businesses across the country have been reporting stronger-than-expected first-quarter results.

The recent downturn in most stock markets is a product of nervousness about the Greek bailout and Europe's future. This is entirely justified, since no one knows how the crisis will end and how painful its consequences will prove over time. But the result, in the short term at least, will be to strengthen the United States. The image of a Europe that is hesitant and divided contrasts with an America that acted speedily, comprehensively and with ample resources. Washington's shock and awe worked; Europe's has not, so far.

Money that was invested in Europe is now flowing into America. This might be a momentary "flight to safety." But there are longer-term implications. The loose talk about the euro replacing the dollar as the global reserve currency has ended. Recent events have vividly shown that the euro -- the only viable alternative to the dollar in the medium term -- is structurally flawed and cannot be banked on. The most significant effect of the Greek crisis might be to enshrine the dollar's reserve role for another generation -- a role that brings with it huge benefits to the United States.

The U.S. government deficit has become a central talking point in policy circles. But the problem is often vastly overstated in the short term. We are not like Greece. Greece has a deficit that is 12 percent of its gross domestic product, with no prospect of economic growth that would reduce that deficit in the next few years. The U.S. budget deficit is 10 percent of GDP, but using reasonable assumptions made by Alan Auerbach and William Gale for the Brookings Institution, it will fall to less than 5 percent in four years. (The Congressional Budget Office suggests the deficit will be lower still.) Greek debt as a percentage of GDP is about 115 percent; U.S. debt is about 60 percent of GDP.

Perhaps the largest difference is that the United States has solid growth prospects, based on economics, technological productivity and demography. That may be why the country seems to have little problem financing its debt. Demand for U.S. Treasury bills remains robust, and foreign governments, including China, have increased their purchases recently. The truth is, if you are a foreign central bank and you want to invest large sums of cash -- tens of billions -- and you need an investment that is reasonably safe and liquid (that is, you can sell it off quickly), there is no better place to put it than American government bonds. It is striking that today America spends less to service its debt, as a percentage of GDP, than it did in 1999 when Bill Clinton's administration was posting budget surpluses. (The reason, of course, is that interest rates are much lower today than they were in 1999.)

But all this good news could turn bad quite easily. The current benign conditions are a short-term phenomenon. In the long run, health-care costs will destroy the federal budget and with it the American economy. Interest rates will surely rise, which will force up the cost of servicing debt. New competitors emerge every year in every industry from other countries that are working hard to make themselves attractive to business.

Events have conspired to give America some breathing room. Leaders in Washington should take the current climate as a godsend and use it to start retooling the American economy. Everyone knows what needs to be done -- restructure entitlements (including state pensions, which are the next catastrophe); force down health costs; reform immigration, taxes and regulation -- and thus restore the country's competitiveness. Or our leaders could sit around and put off all the hard decisions until America finally does look like Greece.

Fareed Zakaria is editor of Newsweek International. His e-mail address is comments@fareedzakaria.com.


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