Europe's basket case economies are in agony as they attempt to get their financial houses in order. In Greece, Ireland and Portugal, government spending is getting whacked, wages and pension costs are coming down and retirement ages are going up. Yet it's not working. National debt loads are still soaring and bailouts are still coming.
There is a lesson here for countries with rising debt loads. If you allow your finances to spin out of control year after year, last-minute efforts to reverse the damage stand a good chance of failing. United States take note.
The common view in North America is that the 27-country European Union is a hopeless mess that will collapse under the weight of bailout loans to an ever lengthening list of burnt-out deadbeats. Greece and Ireland accepted bailouts last year, Portugal is on the brink of doing the same, and Spain and Italy could be next. In truth, some of the EU countries are thriving (German exports are on fire; Sweden is expected to post a budget surplus), some are holding their own (France, Austria) and a few small "peripheral" economies are falling apart (you know who).
But overall, the picture is not tragic. Every EU country is coaxing its budget deficit down, if not its overall public debt. As European Central Bank boss Jean-Claude Trichet noted not long ago, the euro zone's budget deficit is expected to be 4.6 per cent this year, about half of the forecast deficit in the United States and Japan, so don't give up on us. The euro will survive, though sparing it from oblivion will take heroic political and economic determination, not to mention the recognition that taxpayers cannot bear all of the bailout costs; senior creditors have to take some pain too.
The euro zone has at least admitted that spending a lot more than you earn is unsustainable. Not so the United States. For graphic and painful evidence, look at the mother of all PowerPoint presentations - the nearly 500-page "USA Inc." report prepared last month by Mary Meeker, the former Morgan Stanley analyst who was dubbed "Queen of the Net" in the mid-1990s, when she predicted that the World Wide Web would take over the planet. She is now a partner at venture capital powerhouse KPCB and her report analyzes the United States as if it were a corporation.
Her picture is compelling, and not pretty. U.S. spending is going from the excessive to the obscene. She calculates that USA Inc.'s cash flow (the difference between government's cash intake and outflow) was negative $1.3-trillion (U.S.) last year, equivalent to $11,000 per household. Cash flow has been negative for nine consecutive years, totalling $4.8-trillion.
She puts the United States' net worth at negative $44-trillion. That's assets minus liabilities, including the unfunded liabilities of Social Security and Medicare over the next 75 years (which the Treasury Department considers an "off balance sheet" item). The figure is absurd in the sense that it is based on wild assumptions, such as interest rates and the theoretical value of natural resources. Still, it's meant to make a point and the point is that the epic spending has put the United States in dire financial shape.
While no financial crisis is the same, excessive debt from unsustainable spending has played a factor in more than a few of them. New York City, in 1975, Argentina, in 2001, and Greece, in 2010, were all taken down in good part by unfunded entitlement spending (Dubai's crisis in 2009 was a property bubble; Ireland's last year was a property bubble mixed with a bank meltdown).
On the unfunded entitlements front, the United States stands out. Spending on Medicare and Medicaid (the insurance programs for low-income families and the elderly) reached $724-billion last year, equivalent to 21 per cent of government expenses, up from 5 per cent 40 years ago. U.S. government spending on health care now consumes 8.2 per cent of gross domestic product, up from just 1.3 per cent half a century ago. According to the Congressional Budget Office, entitlement spending and interest payments would exceed total government revenues by 2025, assuming current policy goes unchanged.
No wonder the United States looks like Greece writ large. Already, the U.S. budget deficit, forecast at about 9 per cent this year, is worse than Greece's, which should land at about 7.5 per cent. While Greece's overall net debt is monstrous - it was 111 per cent of GDP in 2009 - the U.S. figure is rising more quickly. It grew by almost half - to 55 per cent of GDP - between 2005 and 2009 and various forecasts say the figure could triple over the next 20 years.
Incredibly, the United States has done little to close the yawning gap between expenditures and revenue. The Obama administration recently approved a two-year extension to the Bush-era tax cuts. This is not just unsustainable; it is madness. While the United States watches the euro zone's debt woes with a mixture of amusement and alarm, it might consider that it too is heading off a cliff.
Eric Reguly