Versión Español
EspañolThe origins of the Greek crisis shaking the Eurozone and financial markets worldwide are simple to explain, despite how complex the affair appears at first glance. It’s the outcome of Greece living beyond its means for too many years. Today, Greeks are paying the grim consequences of consuming more than they produced.
It all began with the invention of the welfare state halfway through the last century. Greece, like many other countries, steadily increased the tax burden, allowing it to grow and become the provider of comprehensive social programs: universal health care and education, top-quality pension and retirement plans, and a plethora of benefits for the population at large.
When one adds other state outlays — such as funds to preserve their valuable historical heritage, develop infrastructure, and bankroll losing state-owned enterprises — it comes as no surprise that inordinate sums were required to sustain the spending levels. Tax revenues were far from enough to fulfill these obligations.
Faced with this ever-increasing budget deficit, successive governments have taken on higher levels of debt, mimicking what their counterparts in Latin America did during the 1980s. But in our region, public debt reached a ceiling, forcing governments to undertake reforms that helped relieve fiscal pressures.
Greece amassed a towering debt of over US$340 billion, significantly higher than the country’s Gross Domestic Product. The time came when they couldn’t even pay the interest on such gigantic indebtedness.
This is why the Greek state is bankrupt, because year after year the deficit gap kept expanding, and finally the accumulated debt surpassed the nation’s capacity to pay.
To overcome the gravity of the situation, the Greeks needed an extended austerity period: drastically reduced government while assigning a large percentage of tax revenues to debt relief.
This required a simultaneous reduction or complete elimination of several so-called social programs. In other words, a significant reduction to the lifestyle many Greeks became accustomed to.
The Greek society at large, however, is against the cuts. They claim they will not allow the loss of their “acquired rights,” even when faced with the fact that their government is unable to pay for them.
This situation provoked widespread indignation among Greeks, who outright rejected proposed austerity measures. Alexis Tsipras, a skillful demagogue, capitalized on public outrage to win over the elections by promising he wouldn’t make any more cuts to the welfare state. As a result, Greece is in a dead-end alley, an impossible scenario.
Of course Greece could default on her debt, and bypass the adjustments. There is just one problem: this would force Greece to abandon a strong currency, the euro, and reactivate her old one, the drachma, immediately devaluing all savings.
If this were to happen, Greeks’ lifestyle would plunge, as it happened with Argentineans back in 2002 when they abandoned their national currency’s peg to the US dollar. In both cases, the bubble exploded and with it the illusion they could live the jetset life forever.
The problem lies then not in the euro, not in the creditors’ voracity or the banks’, but rather in a much simpler reason: one cannot live spending more than one earns. Sooner or later, the difference must be paid.
One shouldn’t need a PhD in economics to understand this simple lesson from Greece, a lesson perfectly understood by the poorest of households.
There will be no shortage of demagogues who, to score votes or remain in power, eagerly create short-lived benefits that prove unpayable in the long term.
This reality had to be accepted by Latin America over 30 years ago. The lesson, however, hasn’t been entirely internalized.
Everywhere you go, there are voices demanding higher taxes, higher levels of government spending, demagogues offering endless programs purported to making everyone’s lives easier. Even experts deem our debt levels too low, and therefore manageable, advising us to spend more.
As long as we insist in operating with a budget deficit — for whatever reason, be it for a noble and fair cause — our debt levels will continue to increase, along with our payment obligations, which will have to be paid for by our children and grandchildren.
There will be no shortage of demagogues who, to score votes or remain in power, eagerly create short-lived benefits that prove unpayable in the long term.
The key lesson is to keep public spending in check, think of future generations, and reduce our national debt as much as possible. Just like there are times of prosperity and abundance, there are tough times when reality collects a fee on our delusion that we can live beyond our means.
