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| Europe |
| Greece and the Welfare State in Ruins |
| 2010-02-23 |
| It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues affecting hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency -- the euro. The meaning of Greece transcends high finance. Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, disabled and aged. All welfare states face similar problems: burgeoning costs as populations age; an overreliance on debt financing; and pressures to reduce borrowing that create pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil. Greece is the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt -- basically, the sum of past annual deficits -- was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two-thirds of the debt is owed to foreigners, reports the Institute of International Finance. The crisis originated in fears that Greece wouldn't be able to refinance almost 17 billion euros in bonds (about $23 billion) maturing this April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal and Ireland. Preventing that is what the 16 euro countries, led by France and Germany, are now debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others. These expectations constituted an implicit guarantee of the debt of Greece and other euro countries. If Greece defaulted, the guarantee would vanish and, possibly, trigger a flight from other countries' debt. But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand -- or require -- rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut its government work force and raise taxes on alcohol, tobacco and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble. To some economists, Greece's situation is so dire that default is inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen existing unemployment, already about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and revert to its own currency (the old currency: the "drachma"). |
| Posted by:Fred |
| #10 I remember 1967 too well. Between the frightened, impoverished elderly voters, the angry inner city thugs, the agricultural welfare queens and the public employees including police and fire who will lie down on the job, I suspect we will have severe dislocation. We won't have default here. We'll have Weimar inflation. I'd rather be in Perth if I have to suffer this. |
| Posted by: Nimble Spemble 2010-02-23 19:47 |
| #9 I think the potential for social turmoil from large reductions in welfare is over done. Mostly because the welfare classes are mostly passive. If they weren't they probably wouldn't be on welfare. The demonstrators/rioters that show up at World Bank etc meetings are overwhelmingly the children of the affluent middle class, whose lifestyle is subsidized by their parents, and over paid/under worked union members. But rest be assured large reductions in welfare payments are unavoidable and even then I doubt they will prevent soveriegn debt defaults. |
| Posted by: phil_b 2010-02-23 19:41 |
| #8 its been a losing battle for the last 30 years. It has been for the last 100 years. I am far less optimistic than my distinguished co-commenter, phil_b. At no time in the last 100 years has the voting population swung to the right as indicated by reductions in welfare. Reagan reduced no welfare. Clinton did replace ADFC with TANF, effectively the transfer of responsibility for dealing with abuse to the states, and that is the closest we have come. The people on the public teat are like crack addicts. And it's probably half the voters by now. I think Samuelson is correct: It's an open question whether the collision will cause social and economic turmoil.And I think it is questionable whether republican government or one-man-one-vote survives the coming violence. I would be happy to see a driver's license and a 1040 with tax due (whether paid by withholding or payable) being required to vote. But that ain't likely because those at the teat know the udder would dry up. I doubt a republican government can last 320 years. |
| Posted by: Nimble Spemble 2010-02-23 18:35 |
| #7 The problem isn't so much that the welfare state doesn't work, it's that left of centre governments continually increase the welfare 'bribes' to various groups in order to increase their constituency (ie votes). It's a structural problem in a 1 person 1 vote democracy. Right of centre governments try to increase the number of tax payers in order to counteract the trend, but its been a losing battle for the last 30 years. The unfolding sovereign debt crisis will certainly require large reductions in welfare payments. It will be interesting to see if fewer welfare recipients and more taxpayers swings politics to the right for years to come. IMO it will. |
| Posted by: phil_b 2010-02-23 17:19 |
| #6 The "welfare" state punishes success to reward failure. Is it any wonder the economy dies wherever it's tried? |
| Posted by: Bright Pebbles 2010-02-23 12:45 |
| #5 And in related news, Governor Schwartznegger assures the state that this problem has "no comparison to Kaliforneeeah". |
| Posted by: NoMoreBS 2010-02-23 11:04 |
| #4 But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand -- or require -- rescues? Isn't that exactly what causes socialism to fail again and again? |
| Posted by: gromky 2010-02-23 11:01 |
| #3 High debt and the welfare state are at odds. I don't agree with the ambiguity in that statement. All welfare states depend on diversion of resources from somewhere else. The Nazi state had an elaborate welfare program for its favored beneficiaries, financed by theft and plunder. Greece's welfare was financed by taking out bad loans. Countries that are highly productive (for a time) can finance their welfare programs by taxing a slice of the new production, but when productivity falls, their debt balloons. Guess where that has happened. Of course, when the debt gets high enough, it becomes difficult or impossible to make the welfare payments, and this happened after the USSR collapsed. Free lunch & all that rot. |
| Posted by: Anguper Hupomosing9418 2010-02-23 10:48 |
| #2 In the second half of the 5th century BC, signs of weakening of the Greek society appeared, due to the slave exploit, the pauperization of the small producers etc. |
| Posted by: Besoeker 2010-02-23 08:29 |
| #1 Greece is the counterpoint to any Socialist screed about the failure of capitalism. At least with capitalism you have something left over to rebuild with. |
| Posted by: Procopius2k 2010-02-23 07:51 |