Tag Archives: Euro

The US is not Greece.

Nor are we on track to become Greece. We could make fiscal and monetary policy with a d20 for a decade, and still not be on track to become Greece.

This is not to say that we don’t have problems–we do. But they are very different from Greece’s problems, and they have a very different endgame.

First, for those who have been living under a rock for the last couple of years: Greece is in the middle of a sovereign debt crisis: the government has borrowed more money than it’s willing to repay. Greece was hit particularly hard by the 2008 recession, and its tax revenues aren’t sufficient to repay the debt without making drastic cuts to services and government salaries, increasing taxes, etc. As you may recall, Greece has had periodic riots over a series of austerity plans in the last few years. Meanwhile, as creditors began to worry more and more about whether the Greek government would continue paying its debts, their interest rates have climbed higher and higher–further increasing the problem.

At this point, it’s clear that all of Greece’s remaining creditors will take a haircut on the value of their bonds. That’s created some growing worries about banking systems in other countries–and by extension, those countries’ governments. I’m not going to go into the rest of the Euromess or the efforts to save it, though.

There are a couple of important points to note about how Greece reached its current state. Point 1: when the Euro became the sole Eurozone currency in 2002, markets started assuming that all Eurozone governments were pretty much equally creditworthy. Interest rates on all of their debt converged–not at the middle of the pack, but clustered around the previously-low rates afforded to Germany and France (the largest, richest Euro countries). For Greeks, both private citizens and the government, that meant borrowing got very cheap, very rapidly. That’s the first important piece of why Greece got in trouble.

Point 1.5: Obviously, those investors were very wrong about Greece’s creditworthiness. Part of the reason is that the Greek government (with help from Goldman Sachs, if I’m not mistaken,) essentially cooked the books to get into the Eurozone in the first place. There were some fiscal rules that all EZ countries were supposed to follow, and Greece flouted them. Let’s call that a big, collective “oops!” Moreover, the Greek government is not institutionally comparable to a major developed-world government like France or Germany–it just doesn’t work that well. Rather, the Greek government is a large political patronage machine. That means a huge number of workers are dependent on the government for their (unsustainably high) incomes. It also means that tax collectors are paid primarily not  to collect taxes. That strategy that works really well when you want to employ tax collectors without pissing off people who would theoretically be taxpayers, but it works rather badly when you suddenly need an effective taxation infrastructure to collect money so your government can make bond payments. In short, even if Greece had been following the EZ fiscal rules, it would have been stupid to lend to them at the same rate as you’d lend to Germany.

Point 2: We haven’t yet considered the effects of the common currency. it only gets nastier from here, for a couple reasons. First, if a country with an independent currency has too much debt denominated in their own independent currency, they can just inflate it away. Inflation sucks for bondholders and anyone in the country with savings; it raises future interest rates that the country will be charged to borrow; and it poses a risk of hyperinflation if the central bank does its job badly (or is too responsive to political pressure). But those risks can be less bad than the pain of tax increases or spending cuts necessary to pay down a large government debt. Greece doesn’t have that option: it doesn’t control the supply of Euros, and it can’t just start printing drachmas to pay off Euro-denominated debt. That’s been good for investors so far, since some of them have been able to get out before their bonds lost value, but it’s crappy for Greece.

Greece is also getting slammed by the shared currency because it’s holding the Greek economy back from recovering. If Greece had its own currency, devaluation would be a huge boon to the export sectors–many of which (e.g. tourism) are extremely important to the Greek economy, and have been hammered by the recession. If the Greek government could devalue the currency, vacations in Greece and other Greek exports would become super-cheap, and French people would start flocking to Greece. That would kick-start those sectors of the economy and help raise tax revenue, which would make it easier for Greece to keep interest rates manageable. (Admittedly, that debt stability would come at the expense of Greek workers, whose purchasing power would drop with the devaluation, but  it would be better in the long run for wages to adjust to competitive levels. Since wages and prices are sticky, that hasn’t happened much and Greece’s export sector hasn’t recovered as much as it could have otherwise.)

SO: What does all of this say about the US? Well, in short, we have none of those problems. Greece has skyrocketing interest rates, leading to an immediate-term inability to roll over its debt. The US is paying negative real interest rates to borrow for the next ten years. The Greek government has a first-world debt burden and an advanced third-world level of organization. The US, whatever the current state of our political branches, has an effective, professional executive branch with a power to actually collect taxes. Greece can’t inflate its way out of Euro-denominated debt. So long as we borrow in dollars (a practice that seems unlikely to change in the near future), we will always have that option. Greece can’t devalue its currency to kick-start exports. Again, since we control the supply of dollars, we can.

You will notice that I have not argued that the US doesn’t face any problems. As I’ve said before, we do–some of them are even related to long-term levels of government debt. If you look at those problems, though, they are almost 100% driven by increases in health care spending. (I consider fixing Social Security an uninteresting blip in our long-term fiscal picture. Compared to Medicare & Medicaid growth, it’s peanuts.) That spending will be a problem whether it’s in the public sector or the private. Beyond health care, we have serious challenges to face in improving education and remaking our energy infrastructure. None of those problems, though, has the basic structure of the Greek debt crisis–such a crisis is definitionally and practically impossible for the US. So if you’re going to make grand pronouncements predicting the fall of the American state, please choose a comparison that makes a small amount of sense.

(This post inspired by one of several Facebook conversations in which people have grossly misrepresented the Greek problem, usually by just using “we’ll turn into Greece!” as a placeholder for coherent thought about what problems the US faces.)