A financial storm in Greece has a real chance of shaking up the wider world. The country is in deep debt, so deep that Greece is in danger of default unless drastic changes are made to taxes and spending. Greece serves as a stern warning to the United States of the dangers of a welfare state.
Even though taxation on individuals in Greece is higher than the United States, their amount of public debt compared to gross domestic product (GDP) is more than twice ours. Without the ability to control the nation’s own money supply, the country spiraled downward. Greece’s issues have severely hampered the Euro and the concept of a common currency in Europe.
The most important part of the Greek lesson is the reaction of the nation’s own people to proposed austerity measures. When Greek politicians try to impose desperately needed cost-cutting measures, the people riot. Because of these reactions, what originally seemed like a done deal between members of the EU to bailout Greece is being stalled. There has been talk of a national referendum to approve or reject the plan. Whatever happens, the country’s leadership is in crisis.
The Greek people hear of losses of services and drastic tax increases that they would have to bear. The rest of the world knows it is necessary, but Greeks are too close to the problem.
The Greek populace is no more or less informed than the rest of the world on their own country’s financial matters. Just like when Americans revolt over potential cuts to Medicare, Greeks would like to keep policies such as universal health care and social security, regardless of the cost.
European leaders, including French President Nicolas Sarkozy and German Chancellor Angela Merkel, helped broker a deal where Greece would get to write off half of its total debt in return for austerity measures designed to ensure the country’s financial stability.
Most American citizens deeply in debt would strongly consider such a proposal. In Greece, there was rioting.
American politicians must take note. There is no way for President Barack Obama to get his social programs across without raising taxes on the middle class. The honest thing to do is to go on national television and ask the American people for a 3, 7, 10 or whatever percent tax increase is needed to remain budget neutral.
Likewise, the excitement over eliminating the capital gains tax on the Republican side needs to be met with the same temperament. To make up for the tax cut, some portion of government spending must go. Republicans would do the country a service by being straightforward with their ideas on what should be cut.
That is the best outcome for the United States: For politicians to ask Americans whether a chunk of their salary is worth government programs and have the people decide on an either/or basis at the polls.
Unfortunately, political attack ads make that impossible. Any tax increase or spending cut is lampooned by a citizen with a sob story on how the cut hurt them personally, never mind the millions it may have helped.
These ads are why many Americans, like Greeks, would like to have the best of both worlds with social programs too high for tax revenue to cover. We already know the consequences of that outcome.
As it stands, America is not Greece. Not yet anyways. We have plenty of tax revenue to cover our debt obligations without borrowing. We do not have enough for all of our social programs, but it is still possible to right the ship.
In the European debt deal, Greece would lose some social programs and, as the people probably felt, part of its sovereignty. That is what happens when creditors see potential failure. Europe is trying hard to help because their success is on the line as well. They see Greece as a compatriot, not a rival.
If Americans do not force politicians to discuss fiscally responsible policies, China will eventually come knocking. When that happens, do not expect them to be as polite as Europe.