Are there similarities between Greece's financial situation and that of the U.S.? Both countries have high debt levels and big budget deficits, and both are facing pressure to reduce their red ink. And in both Greece and the U.S., political factions are seeking to grab the spotlight by playing up anger at these economic problems.
Let's look at why some people are worried America could be the next Greece. Greece's budget deficit is 13.6% of its GDP, while the comparable figure for the U.S. is 9.3% (a $1.4 trillion deficit divided by the $15.1 trillion 2010 U.S. GDP forecast). According to The New York Times, Greece's national debt now equals 115% of its GDP. The U.S. debt figure is forecast to hit 140% (although it's currently at a mere 85% -- dividing the $12.9 trillion national debt by the 2010 GDP).
Both countries are in need of serious budget cutting. In Greece, the recent rioting in the streets was driven in part by popular displeasure over a measure the Greek parliament passed to bring its deficit down from 13.6% to 3% of GDP. As I wrote on May 2, the U.S. needs to start a similar budget-cutting exercise, though less drastic and hopefully without the same consequences. To accomplish that, the U.S. would either have to induce much faster growth in its GDP, raise taxes or cut spending by hundreds of billions of dollars.
The Big Difference: A Justified Perception of Safety
The similarity between some of the basic figures is startling, and for some, alarming. However, there are important differences. One big difference between Greece and the U.S. is the direction of the overall economy. While Greece's economy is shrinking, the U.S. economy is growing, 3.2% in the first quarter. By contrast, the Greek economy contracted 2% in the first quarter and is expected to shrink 4% in 2010. And Greece is cutting government spending in the midst of a recession, which it must do in order to get the loans it needs to stave off bankruptcy. This runs the risk of further exacerbating the recession.
The austerity measures in Greece point to the most important difference between Greece and the U.S: the rest of the world still thinks of this country and the U.S. dollar as safe havens for capital. As the world's largest economy and its only superpower, this gives the U.S. access to capital at rates that are less costly than borrowing from the IMF. It is virtually inconceivable that the U.S. could be forced to take sudden, harsh austerity measures under threat of debt default.
Greece, on the other hand, is the 27th largest economy in the world and it appears to have gotten itself into the eurozone without really meeting its fiscal standards. Reasonably enough, Greece is not a place where investors, banks or nations will funnel their money during times of stress. On the contrary, it's troubled economy is one that investors flee.
But it's worth asking, what happens if the U.S. loses its rank and reputation? If some day China, for example, starts to be perceived as the world's financial safe haven instead of the U.S., the U.S. will have to make some painful choices about which taxes need to be raised and what government services can be cut.
Fortunately for the U.S., China has a long way to go before it can match the U.S. as a haven for investors. How so? As Srini Rangan and I wrote in our new book, Capital Rising, China's entrepreneurial ecosystem -- e.g., its approach to corporate governance, financial markets transparency and protection of intellectual property -- lags behind that of the U.S. While the U.S. has work of its own to do on those first two, China is still far enough behind that the U.S. has some time to get its fiscal house in order.
The Politics of Debt
Some observers are worried that Greece's social instability will end up on the streets of the U.S. According to the American Public Media program MarketPlace, the demonstrations that led to the deaths of three young bank employees in Athens on May 5, were "essentially hijacked by these fringe, anti-globalist young Greeks called koukouloforoi -- which literally means "hooded youth" (they actually wear hoods). On May 5, "they threw a gas bomb into the bank and set it on fire."
While the U.S. lacks koukouloforoi, it does have Tea Partiers. To be fair, the U.S. Tea Partiers are generally older, unhooded and nonviolent and are motivated, in part, by anger at big government and Keynesian spending. Even so, the potential for disruptive protest is there, and the anger the Tea Partiers feel about banks and bailouts and out-of-control debt seems to be growing.
Unfortunately, the U.S. is living on both borrowed money and borrowed time -- and both of those debts are going to come due someday. While rioters are unlikely to appear in the streets of New York or Washington in the next few weeks, there will come a day when debts must be paid, whatever the consequences.
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