The Real Greek Tragedy

Article excerpt

Byline: Robert J. Samuelson

Why this is just the opening act.

It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues that affect hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency, the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, and aged. All face similar problems: burgeoning costs as populations age, an overreliance on debt financing, and pressures to reduce borrowing that create parallel pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece seems the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt--basically, the sum of past annual deficits--was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost [euro]17 billion of bonds (about $23 billion) maturing in April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal, and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are now debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. …