Jim Jubak wrote an interesting piece a week ago titled “Euro crisis is tip of the iceberg.” It’s a bit lengthy but well worth the read.
Someday the euro debt crisis that started in Greece and spread to engulf Europe will be over.
Politicians in the nations that use the euro will figure out the right mix of carrot and stick to get Greece, Portugal, Spain and other member states to adhere to European Monetary Union limits on debt. They’ll figure out how to balance national pride with the clear need for more-integrated fiscal systems among the members. They’ll gradually earn back the trust of financial markets, and someday we’ll all be back talking about the euro as a rival to the U.S. dollar as a global reserve currency.
Hard to believe right now, when the euro’s troubles are driving plunges in the world’s stock markets and rampant fears that the world is about to fall back into economic and financial crisis.
Hard to believe but true.
Here’s something, however, that may be even harder to believe: The euro debt crisis, for all its power to shake financial markets and the global economy, is just Chapter 1 in a story that will run for the next two decades. This crisis is only our introduction to the kinds of wrenching changes that virtually every nation’s economy will face over the next 20 years.
The euro debt crisis is a crisis coming to a nation near you. And let’s hope the next chapter suggests that there’s an ending to this story that doesn’t involve street riots and a long-term decline in living standards for entire populations.
Let’s hope. But the lesson from the euro debt crisis is that it’s not going to be easy. It may not even be possible.
You probably don’t think of the euro debt crisis as part of some larger global story that is going to pull in you and your family as starring characters. But it is. This isn’t just a story about some feckless Greeks who went on wild shopping sprees with money lent to them by hardworking Germans who didn’t check the books carefully. (But it is that story, too.)
Some basic economics make the Greek crisis universal.
From the first quarter of 2001 to the third quarter of 2009, unit labor costs in Greece — that’s how much a worker earned for producing one unit of something — rose 33%. That’s a 33% increase in the cost of producing one gimcrack in Greece after you’ve deducted all the benefits of any increase in the productivity of Greek workers. In other words, if a Greek worker went from making one gizmo an hour to making two an hour and got paid twice as much for that hour, the unit-labor-cost increase would be 0%.
Greek productivity did climb, at an average annual rate of about 2% from 2000 to 2010. Greece showed the same productivity growth as Germany, but wages climbed faster. According to Greece’s national collective labor agreement, wages rose 6.2% in 2006, 5.4% in 2007, 6.2% in 2008 and 5.7% in 2009.
The result was that Greece priced itself out of global export markets. If your unit labor costs climb 33% while those of Italy go up just 30% and those of Spain 28% — and while Germany’s costs increase just 6% and U.S. costs plummet 27% (as they did from 2001 to 2009) — you can be sure that selling your exports will get harder.
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The combination of falling competitiveness and an aging population would be lethal enough — fewer workers making less-competitive products to support an increasing number of retired workers — but the Greek government has made it worse. To win voters’ support, governments of all parties not only promised those hefty wage increases, but they also promised generous pensions at earlier ages.
Before the crisis, for example, Greek civil servants employed before 1992 could retire after 35 years on the job if they were 58 or older. And the pension benefit is 80% of pre-retirement salary. The legal retirement age for all workers was just 61 before the crisis. In reaction to the crisis, the current government has proposed raising the retirement age to 63. (No wonder German taxpayers are steamed at the idea of having to fund a Greek rescue plan. The German retirement age is 67.
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Greek politicians weren’t alone in promising future benefits to voters. The average burden of debt, plus liability for pension and other social-service promises, averages 434% of GDP across the European Union. France, with its relatively generous social benefits, comes in at 549%. The United Kingdom stands at 442% and Germany at 418%. Spain, which has a bigger current deficit but relatively modest promises to its citizens, shows up in Gokhale’s calculations at 244%.
And the United States? By these calculations, the debt-plus-promises burden comes to 890% of GDP. Move over Greece. Who’s your daddy?
Now governments could take the next decade or two to plan ways to meet or shirk this burden. Countries could set a schedule of raising the retirement age so that everyone would know what was coming and could plan for it. More-generous incentives for private savings for retirement and retirement health care could help make reductions in government-funded pensions less punishing. Subsidies could give some retirees incentives to choose less-expensive retirement housing.
Governments could do that.
But the evidence of the Greek crisis is that they won’t. Politicians in Greece didn’t take action until the country’s back was to the wall and they had the cover of a crisis to excuse their cuts to wages and future promises. It’s sad to think that a country’s leaders would prefer riots in the streets to proposing painful measures before the situation reaches a crisis, but that’s the conclusion I draw after watching how the Greek crisis has played out.
The transition that I’m describing from a world of glorious promises to an admission that we can’t pay for the promises to a long period of reneging on those promises would be painful enough if carefully planned and managed. But without that planning, I think we’re going to see most — but not all, I hope — countries lurch from crisis to crisis as governments downsize their promises to fit an aging world.
All industrialized nations are pretty much in the same boat as far as debt overload is concerned. It will take just one default, and the domino effect will take over.
Too farfetched?
I don’t think so. A few days ago, during my travels, I read on Bloomberg that the Greek government has engaged the services of a few British economists.
So far their unanimous recommendation has been for Greek to leave the EU and default on their debt. The jury is still out on that one, but watch out for stock market reaction once that possibility is not only seriously considered but actually executed.
It may not be a popular view, but I believe that much of today’s debt can’t possibly be repaid and will eventually be defaulted on. While I am not sure when the first shoe will drop, once it does, we will very likely find ourselves in bear market territory in a hurry.
Fortunately, there are a host of bear market funds/ETFs available, which are featured in my weekly StatSheet, to let us take advantage of that type of trend reversal, whenever it occurs.
