Europe supported its welfare state with borrowed money

Greece, a perennially poor country with a history of fiscal irresponsibility, joined the European Union (EU) in 1981 and the eurozone – the continent's monetary union – in 2001. Since joining the Eurozone, Greece has been behaving as if it were truly rich – the secret was borrowed money, says James K. Glassman, former US undersecretary of state for public diplomacy and public affairs.

At the end of 2009, Greece's public debt was equivalent to 114 per cent of its gross domestic product; that's on top of the 3 per cent of GDP that the European Union contributes as direct aid each year.

Meanwhile, Greece consistently violated the EU's rules for minimum deficit and debt levels.

The Greeks, however, lived better and better, with an official retirement age of just 58; only three-fifths of adult Greeks under age 64 were in the work force.

Greece has had five separate instances of default or rescheduling of its debt since 1826; Germany, eight; Spain, 13 and Portugal, six.

What used to happen to nations living beyond their means is that they defaulted on their debt. Default can impose needed fiscal discipline on a government, but in an age of financial magic and euro-solidarity, default for a European nation is not a burden that has to be borne – at least not yet, says Glassman:

  • On the brink of not being able to pay its debts earlier this year, Greece was bailed out with $100 billion in loans from the 15 other eurozone countries and about $50 billion from the International Monetary Fund (IMF).

  • This year, the Greek government will make interest payments amounting to 15 per cent of GDP on its loans (the United States pays less than 3 per cent).

  • With Portugal, Spain and perhaps Italy heading for similar trouble, Europe announced it would guarantee debts up to $955 billion.

    There are two problems with such bailouts, says Glassman:

  • They do little or nothing to end the leisure-seeking practices, encouraged by high marginal tax rates and labour regulations, that led to the near-defaults in the first place; Greece may promise austerity as a condition for being saved, but don't count on delivery.

  • There is also the matter of moral hazard – the tendency of insurance against calamity to provide an incentive toward behaviour that produces calamity.

    Source: James K. Glassman, Europe supported its welfare state with borrowed money, Commentary Magazine, July/August 2010.

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    First published by the National Center for Policy Analysis, United States

    FMF Policy Bulletin/ 27 July 2010
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