As the debt crisis begins to sweep through Europe, US stocks are starting to feel the impact, with markets dropping over 1,000 points today. But how else does the Greek debt crisis effect us, and what lessons can we take from it to prevent it from happening in this country?
Similarities and Differences
The significant difference between the two countries make many Americans feel that this is a very distant problem that could never happen here at home. One of the major contributions to the crisis was that Greek public finance was notoriously bloated. For example, the Greek government makes up about 40% of the Greek economy, while the US government only makes up about 20% of the economy, according to an article in USA Today. Fox News reported that the Greek census shows about a third of workers to be employed by the government, and retire on 90% full pay. The closely integrated markets of the eurozone are also most likely a contributing factor the situation in Greece and its spread to peripheral countries. The US economy does not have the added complication of a shared currency like the Euro.
However, the reality is that no country is immune from a debt crisis. Currently, there are five other European countries that have been marked by some as at risk, among them Italy, Spain and even the UK. Although this current “Mediterranean contagion” is not expected to jump across the Atlantic, there are lessons we can take from the European crisis to prevent another economic collapse from occurring here.
Debt is Debt
The US debt is currently estimated to be around $8.5 trillion, which is around 58% of the economy; high, but not when you compare it to the over 100% debt held in some areas of Greece. However, if you factor in Social Security surplus, our debt is actually closer to $13 trillion, which is 90% of our economy.
The US could stand to benefit from the current crisis in the EU, as nervous investors move their money out of the eurozone and reallocate capital to other markets. But as the crisis spreads in Europe, additional aftershocks will also be experienced worldwide. European countries closest to the crisis will likely quickly enact political regulation to protect against contagion and restrict cross-border capital flows. To stave off a sovereign debt crisis, steps should be taken to lower risk and opt for liquidity in capital rather than higher returns.
Long Term Sustainability
What is most frightening about this is the denial that many Americans, politicians and consumers alike, have about our own issues with debt in this country. The US is very much a debtor nation, with regard to both our national budget as well as our personal finances. Despite this, just the other week Congress failed to institute a commission organized to propose possible debt solutions. Many politicians are afraid to touch one of the major budget issues, Social Security, because a solution could require higher taxes or getting rid of the program entirely, both unpopular options.
If there is lesson to be learned from Greece, it is how quickly and widespread a crisis of this kind can become if appropriate steps are not taken to prevent it. The US would be well advised to take action to protect itself against the aftershocks of this crisis before they reach us, rather than be forced to scramble to fix the problem after it hits.