EUROPE SUPPORTED ITS WELFARE STATE WITH BORROWED MONEY
July 22, 2010
Greece, a perennially poor country with a history of fiscal irresponsibility, joined the European Union (EU) in 1981 and the eurozone -- the continent's monetary union -- in 2001. Since joining the Eurozone, Greece has been behaving as if it were truly rich -- the secret was borrowed money, says James K. Glassman, former undersecretary of state for public diplomacy and public affairs.
- At the end of 2009, Greece's public debt was equivalent to 114 percent of its gross domestic product; that's on top of the 3 percent of GDP that the European Union contributes as direct aid each year.
- Meanwhile, Greece consistently violated the EU's rules for minimum deficit and debt levels.
- The Greeks, however, lived better and better, with an official retirement age of just 58; only three-fifths of adult Greeks under age 64 were in the work force.
- Greece has had five separate instances of default or rescheduling of its debt since 1826; Germany, eight; Spain, 13 and Portugal, six.
What used to happen to nations living beyond their means is that they defaulted on their debt. Default can impose needed fiscal discipline on a government, but in an age of financial magic and euro-solidarity, default for a European nation is not a burden that has to be borne -- at least not yet, says Glassman:
- On the brink of not being able to pay its debts earlier this year, Greece was bailed out with $100 billion in loans from the 15 other eurozone countries and about $50 billion from the International Monetary Fund (IMF).
- This year, the Greek government will make interest payments amounting to 15 percent of GDP on its loans (the United States pays less than 3 percent).
- With Portugal, Spain and perhaps Italy heading for similar trouble, Europe announced it would guarantee debts up to $955 billion.
There are two problems with such bailouts, says Glassman:
- They do little or nothing to end the leisure-seeking practices, encouraged by high marginal tax rates and labor regulations, that led to the near-defaults in the first place; Greece may promise austerity as a condition for being saved, but don't count on delivery.
- There is also the matter of moral hazard -- the tendency of insurance against calamity to provide an incentive toward behavior that produces calamity.
Source: James K. Glassman, "Europe supported its welfare state with borrowed money," Commentary Magazine, July/August 2010.
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