Greece At Debt's Door

Robert Samuelson looks at the Greek debt debacle and says the real problem is the welfare state:

The central cause is not the euro, even if it has meant Greece can't depreciate its own currency to ease the economic pain. Budget deficits and debt are the real problems; and these stem from all the welfare benefits (unemployment insurance, old-age assistance, health insurance) provided by modern governments.

Countries everywhere already have high budget deficits, aggravated by the recession. Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Spain's deficit was 11.2 percent of GDP, its debt 56.2 percent; Portugal's figures were 9.4 percent and 76.8 percent. Comparable figures for the United States—calculated slightly differently—were 9.9 percent and 53 percent.

There are no hard rules as to what's excessive, but financial markets—the banks and investors that buy government bonds—are obviously worried. Aging populations make the outlook worse. In Greece, the 65-and-over population is projected to go from 18 percent of the total in 2005 to 25 percent in 2030. For Spain, the increase is from 17 percent to 25 percent.

The welfare state's death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day—no one knows when—doubt governments' ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.

Nor is this is a problem that's limited to Greece. Other European nations and the U.S. are all hurtling toward debt-and-deficit disasters. As Matt Welch says frequently, "we are out of money." The country's fiscal situation is unlikely to get better until our policymakers accept that we have to change our spending habits accordingly.