For update of 5/10/2010, see next-to-last para.
Greece is in a world of financial hurt that is affecting the world economy. How it got there is turning into a teachable moment. ABC News last night (5/5/2010) characterized their plight as the result of a “generation” of profligate spending and financial mismanagement. Their reporter said that Greece has become the “poster child” for the European Union’s bad economy.
I am not an economist by education, but I believe I can understand the basics of it. Just know that this is in layman’s terms. What has happened is that the international bond market has lost confidence in Greece’s economic stability. When Greece joined the EU, they agreed to keep their ratio of debt to GDP at 3%. Recently it was 13%! Greece is in danger of defaulting on their bonds, simple as that. ABC News said that some of the practices used included paying civil servants 14 months salary per year (how does that work?), giving them lavish vacations, and providing equally lavish benefits to various unions.
They also mentioned that tax evasion is a national pastime in Greece. Recently their tax officials decided to look into property taxes, which of course are higher when a household has a swimming pool. In one affluent suburb there were 300 swimming pools on the tax books, but when they went to Google Earth and counted the pools in that suburb, they counted 16,000! They then commented that a growth industry has suddenly sprung up for contractors who can provide covers for pools.
When there is more perceived risk, the interest rate a country is required to pay to sell their bonds rises, and for Greece, it has. It is so high now that the rest of the EU, sharing a common currency now, has agreed, with the help of the IMF (includes US dollars), to bail them out with huge loans. Along with the bailout comes the stipulation that Greece has to reform, so benefits and salaries are being cut. The populace is rioting in the streets, gasoline grenades are being tossed, people are dying, trade unions are striking. They don’t get it, they don’t like it, and they want their comfort zone back. Reality is tough. Standing in the wings with economies troubled but not as bad as Greece’s yet are Spain, Portugal, Italy and possibly Ireland. The value of the Euro has begun to fall.
How does this relate to us? Well, we all know that the economy is global, and it is a house of cards. That was really evident in the last two years. How does our debt-to-GDP ratio stand? It is projected at 10.6% for 2010, as reported at: http://www.usgovernmentspending.com/federal_deficit_chart.html . Because of the financial crisis we are walking a fine line between trying to print money to pay our way out of the recession and going the way of tiny but profligate Greece.
Update. According to an article by David Gergen in Parade, 5/9/10, p. 15, “Public spending by federal, state, and local government was 24% of the GDP in 1950, 35% before the Great Recession, and could hit 44% this year (2010).” And, “The European Union has agreed that it is dangerous for a country to allow its publicly held debt to exceed 60% of its GDP. The Congressional Budget Office says that the U.S. could hit 60% by then end of this year, and on its current course could hit 100% by 2020.”
We need to stop spending money we don’t have. Boards need to incentivize management to plan for the long term, not just the next quarter. We need to stop paying CEO’s 300 times the average worker’s salary. We need to get our house in order, because if we don’t, well, it’s all Greek to us.