Greece dodges a bullet but crisis still exists

Early this week the European Finance Ministers and European Central Bank (ECB) along with the International Monetary Fund (IMF) put together a one Trillion dollar rescue package for Greece. To put the package into perspective it is bigger than the bank bailout (TARP) of 2008 which was supposed to be for our entire banking system. The one Trillion is a combination of loans guaranteed by the Euro states and direct loans from the IMF. In addition, the ECB (similar to our Federal Reserve) will start buying government debt abandoning a long held principle against such action.

The real issue is does it make sense to resolve a debt crisis by adding more debt? Another issue is how long will the wealthier European countries guaranty the debt of countries like Greece, Spain and others with debt problems? The risk of course is that the problem could spread to other Euro countries like Spain and Portugal. Their economies are much bigger than Greece’s. Spain for example has a GDP about 12% of the Euro Zone’s output. Just this week Moody’s said a downgrade to the credit rating of Spain and Portugal were possible within a month.

Both Spain and Portugal have announced measures this week to improve their financial picture but it is unclear whether the people or the unions will support the moves. The budget deficit target for the Euro Zone countries is 3% of GDP by 2013. Spain will be at 9.3% next year and expects to be at the targeted rate by 2013. If it doesn’t look like they will hit the target more cuts may be needed along with additional tax hikes. Currently Spain’s unemployment rate hovers at 20%. Spain is important for lots of reasons and if their situation starts to look like Greece’s the financial challenge and social may be overwhelming.

So what about the U.S.? Currently there is not enough revenue coming into the Treasury to pay for all we desire so we either have to increase taxes and cut spending or cuts taxes and hope the economy grows producing more revenue. The first produces results pretty quickly but the gains are generally short term while the latter requires some patience but produces longer term gains. History shows us that reducing taxes while difficult politically is a better economic solution.

The Treasury reported that in April our budget deficit was a record $82 Billion or four times the monthly deficit in April 2009. April was also the nineteenth consecutive month with a budget deficit also a record. To get spending in line with revenue it is estimated that the government would need a combination of increased taxes and reduced spending of about 7 to 10% of GDP. This translates into about one Trillion dollars. By comparison Medicare currently costs about $450 billion. Do we really want to take this approach?

The longer we wait to take meaningful action the worse it will get. We must take action sooner rather than later if for no other reason than the interest on our national debt will increase as interest rates increase. The solution lies not with politicians but more with us as citizens. We must inform ourselves and put pressure on our elected officials to make the hard choices. We must press our leaders to take action on increasing the retirement age, reducing the deduction for mortgage interest, cut pensions for certain workers, manage defense spending better and so much more. We must be open to new ideas and we must work to get the economy going strong again. We must get people back to work. Finally, the day of reckoning is out there and approaching. The longer we wait the more painful it will be to make the hard decisions.