In May, the International Monetary Fund and Euro-zone finance ministers approved an unprecedented US$ 146 billion rescue package for Greece to prevent a default and stop the crisis from spreading to other countries. At that time, the American businessman George Soros said Greece was still in danger of going into “a death spiral,” because the cost of taking on more debt was prohibitively expensive.
Robert J. Samuelson, the influential American columnist, went further; the debacle is nothing less than the “death spiral of the welfare state,” he said, and this is not just a problem for Greece. Many developed countries run the risk of following the Greeks into financial ruin by offering huge health and retirement benefits for their populations without the means to pay for them.
Europe is not undergoing an exchange rate crisis, but rather a crisis caused by huge debt, big government, and slow economic growth. When the euro was introduced in 2002, the new common currency was supposed to facilitate economic growth and promote greater political unity. This didn’t happen. Economic growth in the Euro-zone averaged 2.1% between 1992 and 2001, and 1.7% between 2002 and 2008, held back by high taxes, overregulation and generous subsidies.
In the political arena, the euro is dividing Europeans. The greatest danger is the tendency of some politicians to blame speculators for their problems instead of accepting their problems are due to excessive indebtedness. The majority of European countries run high fiscal deficits, which have grown since 2009 due to the global economic crisis. Last year, Greece’s fiscal deficit was 13.6% of Gross Domestic Product and its total debt equivalent to 115.1% of GDP.
But according to calculations by Jagadeesh Gokhale, an economist at the Cato Institute, Greece’s fiscal mess is much more serious, so much so in fact that its debt is 875% of GDP when measured as the present value of all future fiscal obligations in pensions and health.
Making things worse is the early retirement age in European countries and an aging population combined with higher life expectancy. Greece is nearly the most extreme case in the region with an official retirement age of 58, second youngest only to Italy with 57.
However, the fiscal austerity plans that European governments are trying to implement to stop the financial hemorrhaging are not a substitute for pro-growth economic policies. If Europe takes advantage of this crisis to improve its competitiveness and rein in the welfare state, it could realize the benefits of a huge common market, stable currency and low inflation.
Chile should take away two lessons from the Greece situation. First, given that world growth is by no means guaranteed, we should moderate our level of public sector spending and focus on recovering the levels of productivity we had in the late 1980s and early 1990s. This will allow us to obtain the high levels of growth and employment needed to ensure steady progress towards achieving developed country status.
Secondly, Chile’s solid fiscal situation and low public debt should not be taken for granted. Faced with the constant pressure to increase social spending, Chile should act cautiously and not fall into the excesses of the welfare state that are dragging many countries, including Greece, into the financial abyss. Social protection for the most needy must be balanced with certain requirements, and the assurance that they will become their own agents of change in their future welfare. That is, to go from a Welfare State to a Society of Entrepreneurship.
Ricardo Matte is Director of the Economic Program at the Santiago think-tank Libertad y Desarrollo.
Note: This column was first published in La Tercera newspaper on June 5, 2010.