For those not shaken enough by the Greek financial crisis (and this is more than possible as the Greek’s spending behavior seemed so abnormally destructive and self deluding, in other words ‘that’s the Greeks, not us’) the collapse of the Irish debt situation should get your attention. More importantly, it should awaken those tasked with running the United States government. The Wall Street Journal breaks down the steps Ireland will need to take to get their house in order (emphasis mine):
The measures are draconian. The government plans to shed nearly 25,000 public-sector jobs, slash welfare spending and reduce the minimum wage. A new property tax will be introduced, water charges imposed, and the tax base expanded to bring in lower-income earners. It all adds up to €10 billion in cuts and €5 billion in taxes over the next four years.
Ministers argue that such radical measures are needed to tame Ireland’s gargantuan budget deficit, which this year stands at 32% of GDP—the largest in Europe—and to reasssure investors who have stampeded out of Irish government debt. Yields of Ireland’s 10-year bonds reached a record Friday of nearly seven percentage points above benchmark German bunds.
Yikes. Though the US debt level is no where near Ireland’s astounding 32% level, it is solidly moving in the wrong direction. Ireland is now forced to live the worst of both worlds for a modernized economic state: higher taxes and less government services.
Economist Robert Samuelson describes the Irish bailout’s fallout for the rest of Europe:
The proposed rescue of Ireland, as with Greece before, represents a gamble that Europe can arrest growing doubts and win the patience of bond holders and voters: the investors not to continue dumping bonds (of Ireland and other countries) in panic, which raises interest rates and could precipitate a self-fulfilling financial collapse; and the ordinary citizens to tolerate austerity (higher unemployment, lower social benefits, heavier taxes) without resorting to paralyzing street protests or ineffectual parliamentary coalitions. Whether the gamble will succeed is unclear, as are the potentially chaotic consequences if it doesn’t.
With Portugal on the docket, and much more critically Spain (whose economy is bigger than Ireland, Portugal, and Greece’s economies combined), the EU is undoubtedly facing a financial crisis. When will the German voters bankrolling these bailouts say ‘enough’s enough’? Will the protests in Britain and France over government decisions to either cut back on education spending or raise the retirement age start to paralyze their respective state’s ability to address their growing debt issues?
These crises in Europe may not only foreshadow a future one in the United States, but according to Dr. Robert Shapiro, who served as Under Secretary of Commerce for Economic Affairs in President Clinton’s administration, they may negatively impact our economy drastically right now. Shapiro argues that “a default in Spain would endanger French and German banks and that would have serious consequences for U.S. financial institutions because they all have counterparty risk. Just as Lehman Brothers spread to Europe, a European banking crisis would spread to the United States.”
Many Western states have been living a life of getting their cake and eating it too. ‘I want low taxes and lots and lots of entitlement goodies.’ This combined with a willingness to pay for this all by letting others buy your bonds is unsustainable. In many ways, I view the rioting teenagers and college students in Britain and France as rather pathetic. The situation they’ve been handed is almost entirely not their fault, but now their just worried about getting to eat their cake. Want another metaphor? These youth are seemingly willing to throw good money after bad. Well, the way these governments have spent, more like bad money after bad.
For a worthwhile debate on the present and future role of American government and spending, I highly recommend this debate between Congressman Paul Ryan and New York Times columnist David Brooks.