Is Greece Just the Tip of the Iceberg?

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Fiscal Crisis: Now it's a done deal: Greece got its $146 billion bailout, which the U.S. will help pay for. But anyone who believes the Western world's financial crisis is over doesn't understand what's really happening.

That may sound like a collective sigh of relief coming from Europe. After all, it appears that with Greece's pledge to mend its fiscal ways, the European Union might have turned a corner when it comes to its chronic deficits and exploding debt.

But no problem has yet been solved, and more problems likely loom - not just in Europe, but in the U.S. and Asia as well. We'd like to be more upbeat, but the fact is Greece will have to undergo pretty tough financial treatment to get a clean bill of health.

Its citizens, who are among the most coddled in the Western world, will see their retirement age jump to 67 from the current 53. At the same time, government workers' pay will be frozen for three years, and they'll no longer collect annual bonuses worth two months' pay. Taxes on liquor, cigarettes and gasoline will rise while the value-added tax increases to 23% from 21%.

Pretty bitter medicine, and gauging from the riots and demonstrations that have taken place, we're not sure average Greeks will swallow it. But even if it works, as we said, this doesn't take the sting out of the reality Europe faces.

Virtually every country in the EU spends more than it takes in and has made long-term fiscal promises to an aging work force that it can't keep. A little over a year ago, economist Jagadeesh Gokhale, writing for the National Center for Policy Analysis, produced a pithy - and scary - summation of the fiscal challenges faced by Europe. Don't read it if you have trouble sleeping.

"The average EU country," he concluded, "would need to have more than four times (434%) its current annual gross domestic product in the bank today, earning interest at the government's borrowing rate, in order to fund current policies indefinitely."

In other words, Europe would have to have the equivalent of roughly $60 trillion in the bank today to fund its very general welfare benefits in the future. Of course, it doesn't.

Things haven't changed much since that study was done. So suppose they don't put aside all that money. What then? By 2035, Gokhale reckons, the EU will need an average tax rate of 57% to pay for its lavish welfare state.

Today, Greece is only the tip of a very large iceberg. Portugal, Spain, Italy and Ireland together owe $3.9 trillion in short- and medium-term debts, an amount larger than their combined GDP, estimated last year at $3.3 trillion.

They'll soon have to make massive, unpopular cuts in long-cherished welfare programs or go bust. Even Britain's in the same boat.

They must act now, because the population in Europe is getting old fast. In the future, nations will have neither the will, the wealth nor the productivity to make the necessary adjustments. They'll be bankrupt, living hand-to-mouth.

There's no schadenfreude in this for us, since the U.S. is moving down the same path. Today, our deficit is close to 11% of GDP, and in just 10 years our total debt-to-GDP ratio will hit an economy-killing 90%. We have more than $107 trillion in unfunded liabilities.

As we've observed before, it seems to be a chronic condition of Western democracies that pusillanimous politicians promise far more than they can deliver - and then, almost in unison, blame capitalism (the only real wealth creator) for their ills.

Well, those who do so might want to read the recent report from the Bank for International Settlements - the central bankers' international bank. In it, the global bankers warn of a coming threat to global stability due to the West's fiscal imbalances.

"Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable," the report says. It puts the blame not on capitalism, not on Wall Street bankers, but "fiscal authorities" - a polite way of saying "politicians."

Whether it's Japan, the U.S. or Western Europe, nations today face a surprisingly similar litany of problems: too much spending, too much welfare, too many taxes, too many regulations. These are the policies that have pushed the most economically successful nations in world history to the brink of financial ruin.

The time to change them is now - before we all go over the edge.


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