We're all Greek now

Jeremy Warner is Assistant Editor of the UK’s Daily Telegraph and a highly regarded economics commentator. In his most recent column he looks down the tracks to see what’s coming and what he sees is not very reassuring. Basically the world’s economies are looking in the mirror and seeing—Greece.

The fear is not so much that Greece will set off some kind of financial chain reaction. The world’s economies are not a string of dominoes. Rather, there is a growing awareness that Greece’s predicament, while extreme, is not all that different from that of most of the economies staggered by the Great Recession. “Greece may be in its own particular class of basket case, but it is also just a harbinger of things to come for all fiscally stretched advanced economies.”

As Warner points out, while the global economic contraction has been severe, the financial cataclysm feared by many two years ago did not materialize. Wall Street has rebounded and there is debate about what date will be chosen as the official beginning of the recovery. And yet . . .

. . . there is a continued air of unreality about the whole thing. Everywhere in the West, and even in China, the “recovery” – such as it is – floats on a sea of public support, with the hoped-for rebound in underlying private-sector activity as elusive as ever. More worrying still, the stimulus is beginning to peter out of its own accord. Conscious of the dangers of ending support prematurely, many governments would hope to run large deficits for quite a bit longer. Impatience in the bond markets is fast closing off this option.

Here in the US the affects of the federal stimulus will soon be waning. The Federal Reserve has announced it will cease this spring its massive purchase of mortgage related assets. Interest rates are sure to creep up, likely causing real estate sales and prices to fall still further. The budgets of countless state and local governments are in shreds, yet budget cuts and tax increases are both loudly protested. Unemployment remains stubbornly high and if the recession develops a “double dip” this summer or fall, as many economists fear, it will certainly go higher.

What Warner is saying is that no matter how central governments shuffle and deal their fiscal cards, serious economic adjustments are now unavoidable. Greece is the first country to painfully discover this but it will not be the last.

As the drug-induced stupor of public support wears off, the pain will be almost universally felt. Public policy may have smoothed the comedown, but it hasn’t permanently suspended it. If there is one positive to be drawn from these widening deficits, it is this: they have at least focused attention on the intergenerational debts that we threaten to heap on to our children, and provided the wake-up call needed to address them. Sadly, the necessary structural reforms must begin with our unsustainable pension and healthcare costs. Which means that working longer and saving more will become the defining mantras of the next decade.