Greece Should Be a Lesson for the U.S.

• Greece’s primary fiscal problem is the same as the U.S. – they spent more than they took in for far too long.

• Washington should heed the warning and take care of our debt problem before it gets completely out of control.

It appears that Greece will eventually receive an 86 billion euro bailout from other European governments. This is in exchange for raising taxes, raising the retirement age, privatizing some public-sector activities, and making market reforms. However, Greece has been bailed out twice in the past, and this bailout does not guarantee the end of periodic crises.

History of the Crisis

Greece’s underlying problem is not surprising – for years it spent more than it received in tax revenue. Eventually, its debt reached an unsustainable level and interest rates spiked. In 2010, things got so bad that Greece was given bailout funding from the International Monetary Fund, the European Central Bank, and individual European governments. In addition, the European Central Bank agreed to buy Greek bonds on the open market and to accept Greek bonds as loan collateral, thereby increasing demand for Greek bonds beyond what it would have been otherwise. The bailout required Greece to address its deficit problem by cutting spending and raising taxes. The Greek economy went into a severe recession, shrinking by 25 percent. Due to this recession, Greece needed another bailout just two years later, in 2012. The total amount provided to bail out Greece in the first two bailouts was 240 billion euros – about $272 billion. In early 2015, the Greek people changed governments to the leftist Syriza party to try to renegotiate the terms of the bailout.

What It Means for the U.S. Economy

The U.S. has very little direct exposure to the Greece crisis. Private U.S. financial institutions hold approximately 11 billion euros in Greek debt. In comparison, private German financial institutions are on the hook for as much as U.S. institutions, but Germany’s government holds more than 50 billion euros due to the first two bailouts. Germany’s total exposure is more than 68 billion euros. The third bailout will undoubtedly add to this total.

The real threat to the U.S. would come if Greece eventually exited the Eurozone after this third bailout. The dollar would further appreciate, hurting exports. If other countries then exited the Eurozone, this could have additional harmful effects on the U.S. economy. Of course, continual bailouts could also lead Greece to continue overspending and could encourage other European countries to take the politically easier path of abandoning austerity. This could create new crises with these countries.

Warning Signs

Given that Greece likely does not have a primary budget surplus, it would have had to continue to cut spending or raise taxes under any scenario. The U.S. should learn a lesson from this situation. By failing to put its own fiscal house in order, Greece has temporarily forfeited its fiscal sovereignty. It had two options: give in and structure its budget according to creditors’ demands; or default and lose access to credit markets for an undetermined time, during which it would have to balance its budget as it goes along. It is worth noting that the reason European governments get a say in internal Greece policies is because Greece’s finances are so out of balance that private lenders are not interested in lending to them at anything resembling normal interest rates.

The U.S. and Greece are not in identical situations, since the U.S. controls its own currency and Greece does not. But the overall implications are helpful as a guide to U.S. policymakers. Greece being at the mercy of its creditors shows what could eventually be the fate of the U.S. if policymakers do not begin to bring Washington’s debt under control. CBO reported last month that the U.S. will reach a record level of debt by 2040. The U.S. could eventually be placed in the same position as Greece.