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A Grec⁠i⁠an Formula ⁠t⁠ha⁠t⁠ Leaves You ⁠i⁠n ⁠t⁠he Red

By: The James Madison Institute / February 24, 2010

The James Madison Institute

Blog

February 24, 2010

By Robert F. Sanchez, Policy Director
Is the euro’s current rapid decline in value against the U.S. dollar but a preview of things to come for the dollar itself? Financial experts warn that it could be. Here’s why:
            The euro’s troubles stem from a financial meltdown in one of the European Union’s member states, Greece. Post-mortems suggest that Greece’s troubles stem from the central government’s wild deficit spending, which was exacerbated in part by the big losses that Greece suffered when staging the 2008 Summer Olympics in Athens.
            Then, when Greece’s economy subsequently experienced a steep downturn, the central government made the deficit even worse by engaging in round of “stimulus spending” that pushed the budget deficits far out of proportion to the size of Greece’s economy.
            Now Greece, the cradle of democracy, is experiencing “stagflation,” that toxic drink of economic hemlock that the United States tasted in the 1970s. With stagflation, you get the worst aspects of stagnation and inflation: high levels of unemployment amid rising prices and high interest rates.
            The United States and other nations owe a lot to Greece for its contributions to western civilization. However, the current economic model being followed in Athens is not one that any other nation ought to emulate.
            Fortunately for the global economy, Greece is a small enough player that its troubles won’t send the entire world into another financial crisis; indeed, the other European Union nations are trying to find a way to rescue Athens from its mistakes without causing a drag on the entire EU economy. The task is challenging but manageable – roughly akin to a muscular lifeguard pulling a drowning child from a swimming pool.
            On the other hand, the United States government, with its enormous deficit spending, has already traveled at least halfway down the same rocky path as Greece. The difference is this: When the U.S. economy – still the world’s largest – is in even more serious trouble and is drowning in debt, who will rescue us?
That would be a tall order, indeed — somewhat akin to asking a mere toddler to swim into a riptide to rescue a “plus-size” adult who was thrashing about in rough seas. Yet the relevant question – if the United States does not reverse course soon – is not whether this dire scenario will happen but when.