Europe 2010: A Glimpse of America’s Economic Future?

Terry Miller / May 10, 2010

The Greek financial crisis and its spillover effects in Europe provide a scary look at America’s possible economic future if we don’t get our economic house in order.

Underneath the big bailout numbers ($146 billion rescue package for Greece; trillion dollar support for the Euro and European government bonds) are three related economic developments:

1. The Greek government is defaulting on its economic promises to its citizens – Wage concessions and overly generous pensions, work rules and social spending bought votes and support for the government.  Now the bills are due and the government can’t pay.

2. European government borrowing is becoming more expensive – Interest rates on Greek debt topped 12 percent during the recent crisis.

3. The value of the Euro is falling, down by about 7 percent against the dollar over the last two weeks – This increases the costs of imports to European citizens and fuels domestic inflation.

In Greece’s case, its economic over-extension is the product of years of heavy government involvement in economic decision-making.  When economic policy is driven by political considerations, the line of least resistance is often to spend more now and pay later.  Governments can, at least for a little while, avoid the market discipline that keeps private firms’ costs for both labor and capital in line. European labor costs, in particularly, have grown wildly out of line with world norms, and capital costs have failed to account for real risks of sovereign over-spending and default. (more…)