5.09.2010

A country whose government borrows beyond its capacity must eventually pay the price

America has good reason to worry about Greece

Excerpt:

At the end of last week, the US looked hard at Greece and was scared. So tiny an economy should not be bringing all of Europe low and even threatening to explode the euro, but it is. What started as a US financial crisis plunged Europe into recession; was Europe about to return the compliment? What, Americans began to wonder, did Europe’s problems tell them about their own?

The cause of the present turmoil, Greek public debt, has aroused fears of a wider sovereign-debt crisis and heightened concern about US government borrowing. More immediately, investors are asking, what if the European Union keeps making a hash of the problem? Will there be a second European banking crisis, and would it infect the US financial system? Even if the answer is no, the US recovery is still fragile. The economy would not be immune to another slump in EU demand.

These fears can be exaggerated, but none is unfounded. In any event, fears do not have to be well-reasoned to make a bad situation worse and justify themselves.

The least substantial line of alarm is Greece as fiscal harbinger. The US might not be Greece, say pessimists, but California could be. Here is a state so strapped for cash that it recently resorted to paying its workers with IOUs rather than money. (If that is not default, it is the next best thing.) Could California do for the US what Greece is doing for the EU?


Comment: Interesting to watch unfold. LA is in serious debt ... State of California as well. When will we pay the piper?

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