Unthinkable, Predictable Disasters

The disintegration of the euro, like America's entitlement bomb, is both unfathomable and inevitable.


You'd have to be willfully ignorant to be surprised by Greece's potential exit from the common European currency. First the famously misgoverned country failed to meet the initial 1999 fiscal and monetary targets for euro integration: a budget deficit below 3 percent of gross domestic product, a national debt below 60 percent of GDP, inflation within 1.5 percentage points of the lowest euro-member country's rate, and a stable currency for more than two years. Then Greek officials were forced to admit in 2004 that they had lied when they said they did meet those targets.

In late 2009 the newly elected Greek government let slip that its annual budget deficit was coming in at double its predecessor's previous forecast, which was already double what was technically allowed. The news was hardly startling, given that in its first eight years within the euro zone (2001–08) Greece averaged annual budget deficits equal to 5 percent of GDP, compared to the other members' average of 2 percent; gorged itself on an extravagant 2004 Summer Olympics; and capped off the party in October 2009 by voting in the Panhellenic Socialist Movement party, which promised to spend even more money.

This reckless behavior was in keeping with Greece's checkered modern history, which includes being the first country to be booted out of the euro's main predecessor, the Latin Monetary Union, back in 1908 and suffering through at least four significant devaluations since World War II. That history was why the single biggest question about the common European currency as it was being established in the late 1990s was whether messy, balkanized Greece could coexist monetarily with disciplined, inflation-phobic Germany. Since October 2009 we have had a conclusive answer.

Yet European Union officials still refused to contemplate the inevitable. In January 2010, Joaquin Almunia, the E.U.'s economic and monetary affairs commissioner, insisted that "we have no Plan B" for Greece. Shockingly, some eurocrats were still expressing that attitude as recently as late May of this year. Keeping Greece in the euro zone, European Central Bank (ECB) executive board member Jorg Asmussen said at a conference in Germany, is "Plan A; that's what we're working on." What about the elusive Plan B? "There's already been criticism that there is none," Asmussen acknowledged. "But as soon as you start talking about 'Plan B' or 'Plan C,' then 'Plan A' is automatically thrown out of the window."

You can't plan for disasters by refusing to talk about them. Yet that was the European approach to monetary disintegration until May 6, 2012, when the SYRIZA party won second place in Greece's parliamentary elections after promising to rip up all post-2009 bailout agreements with Brussels. Only at that late date did you begin to hear the first real official war gaming of what a euro-less Greece, and a Greece-less euro, may look like. Unsurprisingly, the last-ditch reality check looked grim.

The National Bank of Greece waited until late May to warn Greeks that exiting the euro would result in a 22 percent reduction in GDP, 30 percent unemployment, 34 percent inflation, a 55 percent loss of income, and a 65 percent devaluation of the new currency. ECB President Mario Draghi, meanwhile, informed the European Parliament on May 31 that the common currency had become "unsustainable unless further steps are undertaken." 

We should not feel too smug as we watch this fiasco unfold on the other side of the Atlantic. Americans display similar habits of mind in the way they talk about, and mostly avoid talking about, our own utterly predictable yet practically unfathomable fiscal maladies. On page 24, reason online Editor in Chief Nick Gillespie and reason Contributing Editor Veronique de Rugy lay out in damning detail what almost every policy thinker knows but almost no politician dares acknowledge: Social Security and Medicare are bankrupting the country and jeopardizing our ability to provide a social safety net. The numbers are daunting: In 1940, Gillespie and De Rugy note, there were 159 workers for each beneficiary in Social Security's pay-as-you-go system; today there are fewer than three. In 2011 Social Security and Medicare accounted for 37 percent of all federal outlays; that share is projected to hit 44 percent in 2020 and 50 percent by 2030. 

If you are not serious about confronting the time bomb of automatic entitlement payments going out to every retiring baby boomer, you are not serious about public policy. Regrettably, though predictably, the two major-party presidential nominees are not serious about this issue. Democrat Barack Obama claimed in May (falsely) that Republican Mitt Romney would cut individual Social Security payouts by 40 percent. Romney, meanwhile, has attacked Obama all campaign season for cutting Medicare, and in May he pledged to keep the country's grossly excessive level of military spending at 4 percent of GDP indefinitely. This is how we are debating a debt crisis that is every bit as inevitable as the Greek withdrawal from the euro.

Washington does not even have the excuse of trying to avoid a bank run, which is surely contributing to European bankers' reticence to discuss disaster planning. Instead, American lawmakers have mostly concluded that confronting our demographic demons is a one-way ticket out of power.

But that's not the only reason the inevitable feels so unthinkable. Some of it, I suspect, is the same reason that Southern Californians keep building houses in the fire- and mudslide-prone foothills, that New Orleans was woefully underprepared for Hurricane Katrina (for more on that, read Tate Watkins' "After the Storm," page 36), and that even the most skeptical investors keep betting on ever-inflating bubbles: We lack the imaginative scope to comprehend the potential devastation, and life is more fun when you believe in the fantasy.

This psychological tendency has produced a damaging political truism: If you promise voters free goodies and no consequences, you win; if you bum people out by saying the party's over, you lose. This helps explains why, as Veronique de Rugy points out in her column on the "Student Loan Scam" (page 20), both major-party presidential candidates support subsidizing federal student loans at below-market rates. For similar reasons, President Barack Obama's cut in employee-side payroll tax contributions, which has made Social Security even more insolvent, retained a bipartisan support even after a Tea Party–influenced Republican majority took over the House of Representatives in 2010.

We don't know which brave political souls—outside of libertarian stalwarts such as Rep. Ron Paul (R-Texas) and Libertarian Party nominee Gary Johnson, both discussed in comic artist Peter Bagge's reportage "Shenanigans!" on page 46—will dare utter the truth about the punishing costs of guaranteeing massive payouts based on birth certificates. But in a sense, that doesn't matter. America will soon face what Europe finally began to confront in May: a reality so brutal that all the usual incentives for kicking the can down the road no longer apply. When that day of reckoning arrives, the best that we can hope for is that enough people will have prepared for it by mapping out how we can convert a disorderly retreat into a sensible withdrawal.

Editor in Chief Matt Welch is co-author, with Nick Gillespie, of The Declaration of Independents: How Libertarian Politics Can Fix What's Wrong with America (PublicAffairs).