Is America becoming Greece?

• Author: Tanner, Michael
• Position: Essay

It does not take more than a glance at the headlines to see that European countries are in trouble. From Greece to Britain, from France to Portugal, it is becoming clear that the modern welfare state is unsustainable, facing fiscal catastrophe, stagnant economic growth, punishing taxes, and prolonged joblessness. European countries are being forced, kicking and screaming, to rethink their approach to social welfare. But how much better off is the United States?

According to the Congressional Budget Office, the United States will run a budget deficit in 2013 of roughly $940 billion (CBO 2013). However, because this does not include "emergency" and other unbudgeted expenditures, it is likely that our deficit will actually exceed $1 trillion for the Fifth consecutive year. Indeed, Congress recently approved a relief bill for victims of Hurricane Sandy that will add an additional $51 billion to this year's deficit. And, while deficits are projected to decline slightly between 2013 and 2018, they are expected to begin growing rapidly once again thereafter, particularly once entitlement programs begin a period of explosive growth after 2020.

Cumulatively, our ongoing budget deficits have resulted in an official national debt of $16.4 trillion as of January 2013. While this includes both debt held by the public and intra-governmental debt, it does not include the future unfunded liabilities of entitlement programs such as Social Security or Medicare. Those "implicit" obligations add tens of trillions in additional debt to our national balance sheet.

As noted, the United States is hardly unique in facing a mounting debt crisis. The Greek, Irish, and Portuguese governments alone owe some 650 billion [euro] (roughly $1 trillion). Spain owes nearly as much as those three combined, 640 billion [euro], while Italy and France each owe more than 1.8 trillion [euro]. All told, EU countries owe almost 11 trillion [euro] (European Commission 2013a). And, that is just the debt that is on the books. If one includes the unfunded liabilities of their pension and health care systems, Europe is well over 100 trillion [euro] in debt.

Europe's debt problems have generated enormous economic and social instability. Indeed, the fate of file euro itself has become uncertain. The ultimate fallout is likely to be worldwide, including a continued slowing of U.S. economic growth.

Europe's ongoing debt crisis provides an extraordinary laboratory, enabling us to view the results once the modern welfare state becomes unaffordable. The instability being seen in Europe today presents the likely endpoint for this country unless we are able to put our economic house in order. The question becomes relevant therefore: How far has the U.S. traveled down file road toward a European-style debt crisis.

Europe's Debt Crisis

Both short-term budget deficits and long-term debt have reached crushing levels in nearly all EU countries. In 2011, the average EU nation ran a deficit equal to 4.4 percent of GDP, but many countries faced much bigger shortfalls. Three EU countries--Ireland (13.4 percent), Greece (9.4 percent), and Spain (9.4 percent)--had budget deficits in excess of 9 percent of GDP (European Commission 2013b).

If rising annual budget deficits represent year-to-year cost of the welfare state, the cumulative total of that profligacy is the national debt, which has now reached an average of 85 percent of GDP. Greece, Italy, Portugal, and Ireland had a total national debt in excess of 11.5 percent of their GDP, and Belgium was close behind at almost 102 percent. In all, 14 countries (Austria, Belgium, France, Germany, Great Britain, Greece, Hungary, Ireland, Italy, Malta, the Netherlands, and Portugal were joined by Cyprus and Spain) had debt ratios higher than the 60 percent of GDP mandated by the Maastricht Treaty that created the eurozone (European Commission 2013a).

It could be argued, of course, that a significant portion of this debt is due to the recession, which both drove down economic growth and revenues and increased countercyclical spending. Programs such as unemployment insurance and income support measures naturally spend more during an economic slowdown. In addition, most nations undertook various Keynesian stimulus measures to spur growth, although those stimulus measures were more limited than those in the United States. And several nations, notably Ireland and Spain, intervened to bail out their banking sectors. As a result, publicly held debt was 32 percent higher by the end of 2011, on average, than before the recession began (European Commission 2013c). As those programs terminate and economic growth resumes, debt-to-GDP ratios will likely decline in the short term. If so, countries are not as close to their debt limits as a current-time snapshot would seem to indicate.

However, it should be noted that most European countries had a substantial debt load even before the recession. Debt-to-GDP ratios in countries that now make up the EU are generally higher today than they were at the end of the Great Depression, although crisis-related factors were similar. This suggests that the current debt levels cannot simply be blamed on the recession (see Abbas et al. 2010). Those countries that had accumulated large debts had no margin to spend more once the recession hit. Moreover, even if they can reduce their debt to pre-recession levels, they will still be in a perilous financial condition.

Most published reports on the size of Europe's debt understate the problem. That is because they only consider one type of debt...