May 05, 2010

A Wake-up Call From Greece

The sovereign debt crisis in Greece had a brief respite when Euro-zone member countries and the IMF agreed on a €110bn rescue package last week-end.  However, the financial markets wanted nothing of it, dragged the world stock markets lower and drove the Euro to its lowest level in 14 months. 


Market sentiment is clearly against the Euro right now; rumors of contagion and a possible eviction of Greece from the Euro-zone are increasingly coming to surface.

The scale of the violent protests against the planned austerity measures which include a freeze on government salaries, the elimination of the standard bonuses for government workers (13th and 14th months pay) and an increase in the retirement age to 63 by 2014 seem completely out of whack considering the miserable state of the Greek government’s finances. 

The Greek crisis and the populist backlash are a wake-up call, not just for Greece and Europe but also for the US and most other developed nations.  The current government budget deficits and the overall debt burden may be frightening but they pale in comparison to the scale of unfunded liabilities for pensions and healthcare.  Temporary measures for bailouts and economic stimulus packages are one thing but without drastic measures, ongoing government deficits are simply not sustainable for the simple fact that people live longer and there are not nearly enough young people joining the work force to generate sufficient government revenues and to support the growing unfunded liabilities.

In my view, the root of the problem (in addition to the obvious irresponsible spending habits of most government officials) is demographic in nature; the easiest way to hint at the scale of the predicament is to look at projected population charts.

Greek Population: 2000   Greek Population: 2050
Greece-2000   Greece-2050

If Greece has problems based on current demographics, the projections for 2050 look even more devastating.

US Population: 2000   US Population: 2050
USA-2000   USA-2050

The US projected demographics are not nearly as bad as Greece but the thought of having 13% of men and 17% of women over the age of 70 makes the current US retirement age a near impossible proposition.

Japanese Population: 2000   Japanese Population: 2050
Japan-2000   Japan-2050

A completely untenable development is under way in Japan.  Currently, almost 10% of all men and 14% of all women are 70 and older.  By the year 2050, those figures are forecasted to reach 24% (men) and 33% (women).  If those projections are somewhat close to reality, the current fiscal imbalances are child’s play.

For this very reason, politicians need to address these issues not just with temporary band aids but with real measures to control spending and to put the economy on a path to sustainable economic growth.  Yes, meaningful measures will be painful and there will be much more at stake than seemingly silly programs like 13th and 14th month salaries.  Politically, this may be an extremely risky endeavor as most politicians tend to play to the mood of the latest opinion polls.  Granted, there are no easy answers but something’s go to give if we want to avoid the obvious path towards the bankruptcy of many nations.  Greece must be viewed as an important wake-up call. Mr. Obama, Mr. Brown (Mr. Cameron?), Frau Merkel, Mr. Hatoyama, Mr. Sarkozy et. al, have your phones been ringing lately?

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