- Atheists’ Easter taunt to Christians: ‘Jesus is a myth’
- Miley Cyrus hospitalized, cancels Kansas City show
- Josh Romney swipes Harry Reid with photo tweet of dad paying taxes — ‘your paycheck’
- Despite Obamacare problems, some Dems want Sebelius to run for Senate: report
- Angry New Yorkers shred gun registrations in deadline day protests
- Uninsured rate dropping faster in places that embraced pillars of Obamacare, survey shows
- Hawaii, D.C. give residents two more weeks to sign up under Obamacare
- Climate change causing fish to lose their minds, researchers say
- Great Britain tops World’s Most Sexist Nation list
- Aaron Hernandez investigated for threatening to kill prison guard
ROHAC: Eurozone recovery necessitates reform
Day of fiscal reckoning approaches
The ongoing debt crisis in the eurozone has given rise to a predictable genre of tasteless humor directed at the ailing nations on its periphery. A typical example would go like this: An Italian, a Portuguese and a Greek go into a bar and have a round of drinks. Who pays? The German.
Although it is unfortunate that the crisis fosters ill-advised national stereotypes, such jokes do raise the serious question of why nations in the eurozone’s Mediterranean area seem unable to deal with their fiscal problems. At some level, their problems are simple — they boil down to basic math. Italy, Spain, Portugal and Greece have been living beyond their means for far too long, they have run out of money, and their governments simply need to adjust their spending patterns to economic reality. Their problems are not new or unique — the world is rife with examples of countries that faced similar, if not greater, economic difficulties, and they were able to overcome the adversity through deep and credible reforms.
For a recent example, look at Estonia, Latvia and Lithuania. As economist Anders Aslund writes, the Baltic states were hit in 2008 and 2009 by a nearly complete liquidity freeze, which sank their economies by as much as 24 percent. In response, the government followed strict austerity, with a fiscal adjustment of about 9.5 percent of gross domestic product, accompanied by far-reaching structural reforms. All three returned to their growth trajectories after only two years of recession, and their economies grew at rates higher than 5 percent last year. In short, “the turnaround, driven largely by manufacturing exports, has been one of the most remarkable and promising stories of the crisis,” Mr. Aslund writes.
There is a world of difference between the Baltic states and, say, Greece. Throughout the ongoing “consolidation,” Greek debt-to-GDP ratio has been growing and will reach 179 percent next year — in an optimistic scenario. Recovery is nowhere in sight, and the Greek economy has been in a free fall since 2009. It is also predicted that the GDP will contract by 4.5 percent next year. The unemployment rate is at a historically unprecedented 25.4 percent, with more than 58 percent of young people unemployed. Every attempt to slash public budgets or remove structural rigidities is met with popular resistance.
So what prevents the Mediterranean countries from emulating the Baltic example or those of many other countries, such as New Zealand or Sweden, which have overcome their economic difficulties through serious reforms? The answer is simple: credibility, or the lack of it.
Unlike their Baltic counterparts, it is not clear that the Spanish, Greek or Portuguese politicians are keen reformers. The party of Greek Prime Minister Antonis Samaras was responsible for setting Greece on a path toward economic ruin in the early 2000s. Referring to cuts made in the 2013 budget, Mr. Samaras said those “sacrifices will be the last.”
Even if we see some Mediterranean leaders wishing to follow the example of growth-oriented leaders such as Poland’s Leszek Balcerowicz or Estonia’s Mart Laar, their prospective reforms are unlikely to stick. In Greece, for instance, the extreme left-wing party, Syriza, which rejects austerity and aid from the European Union and the International Monetary Fund, is now the most popular political force in the country.
Reforms that are just imposed, without a buy-in from a critical part of the population, tend to be reversed later or are neutralized by interest groups. When Russia’s Yegor Gaidar first outlined his shock-therapy program in the early 1990s, it did not look very different from reform packages adopted in Poland or Czechoslovakia. Unlike people in the more successful transitional economies, however, Russians never bought into Mr. Gaidar’s radical reform agenda. As a result, the reforms led to drastically different — and much less agreeable — outcomes.
The essence of the debt problem and the fixes that are most likely to work are relatively simple: deep structural reforms and permanent cuts to public spending. Unfortunately, the political reality — including a lack of credible leaders and of public understanding of the nature of the existing problems — has taken most of the good policies off the table.
The debt crisis raging in the Mediterranean is by no means a singular incident. The daunting fact is that with their unsustainable entitlement schemes, faltering demographics and lack of growth, Western Europe at large and the United States are well on their way to follow the Greek example. It remains to be seen whether we are better prepared than the Greeks to face our day of fiscal reckoning. Don’t hold your breath.
Dalibor Rohac is an economist at the Legatum Institute in London.
TWT Video Picks
By returning to Christian roots, the nation can achieve greatness once again
Get Breaking Alerts
- Fuel-filled wings, ability to swarm: Pentagon offers glimpse at future of drone fleet
- Secret U.S. assessments show Afghanistan not ready to govern on own
- CARSON: Recovering Tocqueville's vision of American exceptionalism
- 'Culture of intimidation' seen in Nevada ranch standoff
- GOP writes legislation to deny Attorney General Eric Holder his salary
- Nevada Bundy ranch standoff could leave dirt on Harry Reid reputation
- WEBER: Obamacare cuts home healthcare for millions of seniors
- HURT: Wilson and Obama ... 100 years apart, but so alike
- U.S. Navy to turn seawater into jet fuel
- Al Qaeda mocks U.S. in 'extraordinary' Yemen gathering; experts fear CIA caught flat-footed
Recent Letters to the Editor
- LETTER TO THE EDITOR: Solution to Cyprus dispute is no 'mistake'
- LETTER TO THE EDITOR: Obama's real wealth redistribution scheme
- LETTER TO THE EDITOR: Obamacare numbers nothing to celebrate
- LETTER TO THE EDITOR: Unanswered bus-crash questions
- LETTER TO THE EDITOR: Lerner won't face meaningful punishment