The election outcome in Greece will have been decided between the writing of this article and its publication. No matter. No election result will remove Greece from the predicament in which it finds itself. It’s a great shame political leadership in Europe has not been honest with the electorate. As a consequence, they are promoting an economic environment which, for many European jurisdictions, is no longer globally competitive.
A comparison to the situation in the United States might be helpful in better understanding this complex situation.
America has rung up huge debts ($4 trillion under Obama alone). More significantly, the promises it has made under so-called entitlement programs – Medicare, Medicaid and Social Security – are clearly unaffordable as they amount to a present day value of roughly $50 trillion. The U.S. is able to finance its fiscal deficit because its lenders have confidence it will get its house in order, bring its deficits down to levels less than annual GDP growth and reform its entitlement programs. The U.S. also has its own central bank, the Federal Reserve, which can in effect “print money” by buying government debt. Moreover, the U.S. dollar is the world’s only true reserve currency and the Fed can effectively issue dollars at will to ready buyers.
This all holds together as long as there is confidence the U.S. can grow its economy, continue to be globally competitive (a prerequisite to economic growth) and reform its spending obligations. This optimism is probably well-founded as the U.S. has proven itself to be incredibly resilient, it has the world’s premier post-secondary education institutions, the world’s most robust capital markets and arguably it’s most entrepreneurial culture. For proof, just look at the number of new economy companies that are a product of this symbiotic relationship: Google, Apple, Cisco, Intel, Facebook – the list is extensive and without equal.
In Greece, the promises which successive governments there have made are not supported by current revenue (absent new taxes), so the country must borrow. The resulting debt had grown to such proportions that lenders would no longer lend and all agreed to a restructuring – a polite term for a write-off of about 50 per cent of that debt. You can imagine how its capacity to borrow further is constrained by the lack of confidence the markets have in its ability to get its house in order.
To rebuild a competitive Greek economy – one capable of growth, job creation and production of the extra tax revenue the government so desperately needs to respond to both its debt and spending obligations – will require a host of politically difficult reforms. These include lower salaries, fewer public servants, massive reform of the regulatory environment, opening up professions to new entrants and more competition, making it easier to fire workers and start new businesses. It will no longer be possible for Greeks to retire at ages less than their counterparts in Germany. Many of the country’s social programs will have to be scaled back. Such moves will not be easy or pleasant to implement, but there is no choice.
Greece is part of the eurozone and therefore its central bank can’t print euros. It must borrow them from the European Central Bank, but the ECB will not lend Greece funds absent such reforms or in the event it decides to default on its debt. Neither will anyone else. Exiting the eurozone brings its own problems. Yes, the Greek central bank would be able to print drachmas and buy its government debt, but what would those drachmas be worth? Zimbabwe and other jurisdictions that have tried to insulate themselves from becoming globally competitive have found the price to pay is rampant inflation and a huge erosion in the standard of living.
My point is simple: No country can live beyond its means and no country can afford to ignore the discipline of ensuring the promises it is making are consistent with its ability to fund such promises. Most importantly, such promises or benefits must be in keeping with what countries elsewhere enjoy.
So, when our own government says it must move the retirement age to 67 from 65, or reform our E.I. system, understand that these are not changes any government wants to impose. But it is a responsible thing to do.
We need to ask ourselves: do we want our policy makers to do the right thing or do we want them to tell us what we might like to hear?