Greece’s window on America

It is the land of Plato and Aristotle, home to the Acropolis and Parthenon, the birthplace of the ancient Olympics and the place from which the Olympics were re-born for the modern age over a century ago.

It is Greece and, in its efforts to solve its budget crisis, it may offer a window into America’s future – and the world’s.

We should not over-simplify, for Greece is not the United States. The former is a small nation on the southern end of the Balkan Peninsula, with scattered islands to the south and east and a past that’s far more memorable than its present.

The latter remains the world’s pre-eminent economic power, its currency still the main means of commerce across the globe. The world has far more at stake in America’s economic health than Greece’s, and financial markets will likely give the United States far more time to fix its budget problems than any other nation.

Nevertheless, Greece and the United States suffer from huge deficits that, at least in the short term, are similar. Athens ran a deficit last year of 12.7 percent of gross domestic product (GDP). Washington’s deficit last year hit 9.9 percent of GDP, and this year’s is expected to exceed 10 percent.

While Washington has put off deficit cutting for another day, Athens faces overwhelming pressure from its European neighbors and from the markets to act now. That pressure, and Greece’s experience in responding to it, may prove prophetic for America and the world in two ways.

First, if the fiscal troubles of a small nation like Greece can threaten not only its own economy but the world’s – as they are doing today – the global implications of America’s fiscal troubles are ominous indeed.

In Europe, Greece’s deficits have sent public confidence and the euro down, both weakened by fears that the European Union may have to help bail out one of its members. Standard & Poor’s and Moody’s Investors Service have threatened to lower Greece’s credit rating, further unsettling the markets.

Nor is the United States immune from the fall-out. Greece’s fiscal contraction – and the need for comparable steps by Europe’s other fiscally troubled nations – may undercut America’s fragile recovery.

As for that recovery, Washington is focused on further stimulating its economy, which will boost its short-term deficits. That’s fine, for a healthy global economy depends heavily on a healthy U.S. economy.

But, the United States eventually must address its longer-term deficits. The question is whether policymakers will act of their own accord or a market-driven crisis will force starker action upon them.

Hopefully, as soon as the economy is stronger, policymakers will impose gradual tax and spending changes through which savings will grow over time. The quicker they act, the smaller those changes must be. If they act quickly enough, the changes should not unduly burden any group of Americans.

But, if Washington waits too long, nervous investors could reduce their dollar holdings, sending the dollar plummeting and interest rates and inflation soaring. All of that will rattle markets across the globe, forcing U.S. policymakers to immediately take dramatic action on taxes and spending to restore confidence. The Greek problem of today will pale next to the American problem of tomorrow.

Second, Americans seem no more willing to accept the bitter medicine of deficit reduction – particularly the dramatic action that a market crisis could force – than the Greek people have displayed.

Athens has taken a series of steps to reduce its deficit from last year’s 12.7 percent of GDP to 8.7 percent this year, the most recent of which includes cuts in civil service entitlements and increases in sales and other taxes.

In response, labor unions have launched a series of strikes and walk-outs by teachers, sanitation workers, tax and court officials, local government employees and others. Police have sometimes used tear gas and arrested protestors to restore order.

Because Washington has not yet addressed its long-term deficit problem and markets have not forced the issue, we don’t know for sure how Americans would react to the harsh fiscal medicine they may face.

But we can glean some hints from public reaction to the deficit cutting that’s occurring at the state level. The recession has generated huge state budget deficits and, facing legal requirements to balance their budgets each year, states must act.

In California, which faces the largest and most intractable budget shortfall, tens of thousands of students and teachers recently protested the proposed tuition increases and other measures that would help fix the problem.

Those tuition increases may be sizable, but the protests were nevertheless unsettling. What federal policymakers may have to do in response to a market-driven crisis – slashing Social Security, Medicare and Medicaid, for instance, while raising taxes – may make such tuition hikes seem quaint by comparison.

Let’s hope it doesn’t come to that.

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