Europe's Economic Measures Too Little Too Late
U.S. must not be smug; should act now on its own finances
November 7, 2011
The euro area has a real-time debt crisis already; the United States has a slow-fuse possible future debt crisis. The euro zone has unnecessarily provoked contagion from Greece to first Ireland and Portugal and now Italy and Spain. The July 21, 2011 Greek support package, with its large euro area loans at low interest rates and its 30-year extension of government debt held by banks and other private holders, would have been sufficient to deal with Greece if adopted in early 2010. Instead the May 2010 package imposed penalty interest rates and made the unrealistic assumption that private lending would return already by 2013. German proclamations about forcing the private sector to share losses triggered unnecessary contagion. Now Prime Minister Papandreou has followed the October 26 package—with its additional relief through a 50 percent haircut for private holders—with a call for a referendum. If his gamble succeeds it could galvanize public commitment to the hard measures ahead; if it fails, so will his government, the new package, and perhaps Greek membership in the euro.
The United States wins only when graded generously on a curve. Partisan deadlock and the hostage-taking threat of default in late July needlessly blemished the U.S. credit reputation. Most economists agree that in the medium and long term there must be fiscal adjustment, especially through curbing excessive increases otherwise likely in social healthcare spending, but that in the short term fiscal contraction should be avoided until the economy gets back on its feet. Those who insist that fiscal correction cannot involve any tax increases need to explain whether they truly think that with a much higher share of the population over 65 than in the past the spending on elder health and Social Security should nonetheless be an unchanged percent of GDP, or else spell out where the extra resources should come from if not taxes (or defense). Even if the Joint Select Committee fails to agree later this month, an imminent crisis seems unlikely because of the automatic formula that kicks in (and not before fiscal 2013). But the United States has little to be proud of so far in the debt and fiscal policy competition.