Greece’s problems concern us more than you think.
Germany is expected tomorrow to endorse a bailout of sorts for a Greek government whose recklessness has endangered the euro, the only currency besides the dollar that can be credibly called a global reserve currency. As the largest country that uses the euro, Germany has both the motivation and the wherewithal to keep Greece’s exploding debt from bringing down the Old World’s still-new currency.
I won’t try here to explain or predict all of the knock-on effects this could have for the dollar or our economy, although there are many. For instance, questions about the euro have sent investors fleeing to the dollar, perhaps keeping the dollar artificially high and masking problems that we eventually will have to confront.
I only want to make a very simple observation about what gets spendthrift governments in the end — including, potentially, the U.S.
For years, the most profligate European welfare states stayed afloat in part by manipulating their currencies, chiefly by devaluing them periodically to make their debts less burdensome. This was a vicious circle, one which finally was to end with the introduction of the euro. The new currency and its austere, mostly apolitical European Central Bank was a sort of deus ex machina for the likes of Portugal, Italy, Greece and Spain (now lumped together as the PIGS, with Ireland sometimes making it PIIGS).
At least, it was for a while. But they did not couple the monetary discipline imposed by the ECB with new budget austerity. Their debt-funded welfare states remained largely unreformed, despite near-unanimous opinion that reining in social spending was necessary. Loose monetary policy gradually exacerbated the problem, but a tighter policy alone wasn’t enough to solve it.
Now Washington, having counted on the Federal Reserve to fuel the party and then give us a hair of the dog when the hangover hit, wants to increase entitlement spending in the same direction as the PIGS and other European welfare states. And even if the Fed somehow manages to bring some sobriety to bear, we will still be spinning out of control if the budget keeps growing. Just like the PIGS.
Blame Bush, blame Obama, blame whomever you want. What matters at this point is which direction we take. Athens is the wrong destination.
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