Michael Shuman of Time's The Curious Capitalist discusses the future of the U.S. debt burden in the context of Greece's fiscal debacle, suggesting a balanced approach to avoiding default.
The world economy dodged a bullet today. Parliamentarians in Greece voted in favor of a painful package of austerity measures aimed at reducing the government's yawning budget deficit, controlling its ballooning debt and convincing the rest of the euro zone to continue to support the country with rescue funds. The vote paves the way for a second EU-led bailout and probably holds off a default, at least for now. It probably also will quiet fears that Greece's debt crisis would spread turmoil throughout global financial markets (though perhaps not for very long).
The tragedy unfolding in Greece means even more than that. With much of the developed world -- including the U.K., Japan, and yes, the U.S. -- facing heavy state debt burdens, the events taking place in Greece are a glimpse into the future for many of the global economy's most important nations. As politicians in Washington wrangle over the debt ceiling, budget cuts and taxes, we have to ask the question: Is the U.S. heading in the same direction as Greece?
I should state right at the state that the U.S. is not Greece. In many important ways, the situations these two countries face are extremely different. First, the debt burden of the U.S., relative to the size of its GDP, is not nearly as large -- just under 94% compared to 147% for Greece at the end of 2010, according to the OECD. Secondly, the level of U.S. debt is considered sustainable; Greece's isn't. Generally, there is a widespread belief among those who follow European finance that Greece is unlikely to be able to pay off its current debt load. Those very divergent perceptions are reflected in bond yields, a sign of the risk investors believe they take on by holding the bonds. Ten-year Treasuries are trading at a yield of only 3%; Greece's are at 17%. Third, the U.S. has far more flexibility in how it deals with its debt than Greece. The U.S. can devalue the dollar or inflate its way to a lower debt burden. Those measures have their own consequences, but they make an American default much less likely than a Greek default. Since joining the euro zone, however, Athens has lost control over its monetary policy -- it can't devalue the euro or control its supply. That means the adjustment for Greece will potentially be much more painful than the one America faces. And lastly, the U.S. still has control over its own fate and can choose the course it takes in tackling its debt and deficits. Greece is at the point of no return. The Greeks have the EU shoving austerity measures down their throats. They don't have options; the Americans do. Whether or not the U.S. ever ends up like Greece depends on what Washington does with those options.