Back in December, Greece’s financial condition wasn’t even on our radar. And if Greeks were still using the drachma, it probably still wouldn’t be. But Greece is one of fifteen eurozone countries that share a common currency as their sole legal tender. So Greece’s problem is Europe’s problem. And because Europe accounts for nearly a quarter of US exports, Europe’s problem is our own Greek tragedy.
Greece’s deficit is 12.5 percent, more than four times the EU limit. Their total debt is 120 percent of GDP, or approximately $350 billion. They need to borrow another $72 billion this year, much of it to refinance debt that’s coming due. Without a loan guarantee, they simply won’t be able to borrow that money and seriously risk default. And since the bulk of Greece’s debt is owed to the sovereign banks of Germany, France, and Switzerland, a default could bring about a collapse of the entire European banking system.
Germany, by far Europe’s most successful export economy, will likely shoulder the lion’s share of any bailout. But a poll conducted last July showed 70 percent of German citizens opposed using German taxpayer funds to bail out Greece and Ireland. And that was before it was revealed that the Greeks basically lied about their finances to qualify for admission to the eurozone, most likely with advice from giant US investment bank Goldman Sachs.
Furthermore, Portugal, Ireland, Italy and Spain are in similarly precarious shape. In fact, Mediterranean countries (along with Greece, collectively known as the PIIGS) were allowed to enter the EU with an exchange rate that substantially overvalued their currencies relative to France and Germany. A bailout of Greece will no doubt give rise to demands from the other fiscally flailing countries for comparable relief.
Nonetheless, the eurozone countries, Germany in particular, seem resigned to providing some sort of financial support. In exchange, they are demanding that Greece cut its deficit down to 8.7 percent in 2010, 3 percent by 2013. This will require dramatic cuts in entitlements (over 50 percent of GDP is government spending) and across-the-board tax hikes. It won’t be easy. Greek unions are very powerful; nearly all of them have gone on strike over the EU proposal.
For now, US companies that sell aircraft parts, machinery, entertainment and agricultural products to Europe can breathe a sigh of relief. But the long-term outlook for Europe isn’t necessarily so rosy. Investors continue to short (bet against) the euro.
Don’t look now, but US metrics – - fiscal deficit and total debt as percentages of GDP – - fall smack in the middle the PIIGS. Because just like the PIIGS, we have massive entitlement programs and an ever-expanding government payroll. The US can run up big bills and print the money to pay them for only so long. Inflation will accelerate, diminishing the value of the dollar and threatening our AAA credit rating (despite Treasury Secretary Geithner’s protestations to the contrary). We’re all Greeks now.
Amy H Laff
Amy H Laff is a StateBrief.com partner. A graduate of Univ of Penn and Stanford Law School, Amy practiced law and mediation on the east coast before relocating to the Valley, where she founded and chairs the AZ chapter of the Republican Jewish Coalition. Amy makes frequent media appearances, including AZ Law Channel and Tony Katz Radio Spectacular. Additionally, she works with companies and candidates on branding and communication. 
Now that we are told that the US deficit equals that of Greece… what about the cost about to hit this country of the 2012 Olympic Games. One would logically conclude that the Greek’s would have included the cost of holding their games in their current acknowledged deficit. So It would appear that our economy is in an even worse state the than theirs.
woops.. 2010 Olympics are in London. Shame on me. Regardless, Greece is still in a major hole.
What mechanisms are in place to force eurozone countries to comply with the euro guidelines? How was a eurozone country allowed to run up four times the allowed deficit, and reach the brink of disaster before action is taken? Seems to me like there should have been an intervention a long time ago.