The Perks of Not Going Greek
By Jeremy Weltmer • Friday, May 21, 2010 10:34 am
Yet again, Greek unions are striking over the austerity measures imposed under the deal with the IMF and the eurozone countries. In particular, they reject the increases in the retirement age, decrease in pension benefits, and decreases in minimum wages, so they have declared general strikes and taken to the streets to decry the government’s actions.
As the Wall Street Journal reported this morning, “One of those in favor of strike action is Eleni Mitsou. ‘We are striking against the measures the government agreed to with the IMF and the EU that do not allow us to survive,’ said Ms. Mitsou. ‘With the new measures, new entrants into the work force will have their starting wage cut to €560 from €740, and they can't live on that,’ she added.”
Yet the protestors have missed something crucial: there is no viable alternative to stringent and unpopular austerity measures for the foreseeable future. If Greece chose not to enact them, then their debt restructuring and loan package from the IMF and the eurozone would fall apart, and the entire reason that Greece needed the deal was because investors would not buy its debt.
So, the alternative would be a sovereign default. First off, this would push the rest of the world to suck all of its capital out of Greece in search of stability, and it would not return for the foreseeable future. Just examine Argentina for proof of what happens to foreign investment after a default. Next, it would push all of Greece’s domestic investment (much of which is held by institutional investors like pension funds) to the brink of insolvency as values plummeted in response to the default, which would make matters even worse for recipients of pension benefits.
Greece didn’t have a choice, and the strikes smack of impotent childish pouting: no matter how long the strikes go, nothing will change because no other options exist.
For Americans, one clear lesson emerges: cut spending when the cuts can be considered fully and be voluntary. To wait until the brink of disaster and cut precipitously accomplishes the same objective, but at a massive cost to investors in terms of lost value. Moreover, gradual cuts over time allow for market adjustments and corrections, and they ease the public into the changes to allow outlooks to change.
One cannot reform an electorate’s view on what a government is and should be doing for it overnight, but in order to foster a culture of self-reliant investors who do not look to the government as a hedge against market risk, a guarantor of high standards of living, and a proffered hand of healthcare and retirement benefits, gradual legislative changes must occur to nudge mindsets in that direction.
Americans can follow the Greek model in one way though: take to the streets and the voting booth, but demand plans for fiscal prudence and demand them now. The costs of waiting and making the hard choices of what and how to cut later would be far more.
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