What Happens in Greece Will Spread to the U.S.

Five European Union countries are up to their neck in debt.

Sounds familiar doesn’t it? Just like the U.S., Greece, Ireland, Portugal, Italy and Spain spent more than revenue receipts. Greece is the largest indebted country in the European Union, at 157.7% of BIP (Gross Domestic Product- GDP), contracting at a minus 6.9% (annualized 2010) on required spending cuts. To avoid debt default, Greece, in 2010, received a European Union credit of 110 Billion Euros. Attached in getting a bailout, Greece had to initiate austerity measures, by cutting staff and salaries of government employees, increase taxes in every sector of the economy, privatize and sell airports, ports and harbors. Despite all cutbacks, Greece sank deeper into debt, forcing the country to ask the EU for a second bailout, this time for a second EU credit worth 109 billion Euros.

Bailing out Greece continues to anger many Germans, the EU’s main economic engine. Here, retirement starts at 67, whereas in Greece, one retires at age 57 (being raised to age 60 and in further age increments to 62). In essence, while a German continues to work till 67, a Greek enjoys a pension, paid for at the expense of German labor.

To prevent a European debt crisis from escalating, the European Union imposed cutbacks on millions of individuals in all other debt-plagues EU countries. Italy’s debt ratio is 120.3% of BIP. To avoid the Greece example, Italy made spending cuts worth 93.5 billion Euros, with tax increases, government employment layoffs, retirement (for women) to age 65, and requiring a balanced budget through 2013. Ireland has a debt ratio 112% of BIP, it cut spending through government job elimination, lowered the minimum wage, increased taxes throughout, and soon inhabitants will have to pay for drinking water. Portugal’s debt ratio is 101.7% of BIP and although minute in gross domestic output within the EU, initiated salary reductions in the government sector, pension cuts, cuts in unemployment benefits, increased taxes, and privatized government holdings. Spain, is the dark horse. Last year, Spain’s public debt in percent of BIP stood at 68.1%, less than the public debt of France or Germany. However, Spain’s economy continued to tank, with the government writing ever larger deficits. With easy money and available credit, Spain went on building boom, just like the U.S. did five-six years back. Today, tourist centers on Palma, Ibiza, Alicante, Malaga, look like their American counterparts of Ft Myers, Miami, cities of Stockton, Merced, or, Henderson, Nevada.

The sparking point to the European mess can be traced back a dozen years ago, with the creation of the Euro. The currency was enacted without the coordination of a political, financial and economic thought-through process for individual EU members. Countries, like Greece, with a low gross domestic product, suddenly profited from a stable Euro, easy and cheap credit, borrowed like there was no tomorrow. In the process, enormous amounts of capital flowed into Greece. It all came to a grinding halt in the fall of 2009 and the discovery, Greece for years, hid the country’s real financial debt. Since the Greek revelation became known, an entire Europe went into a downward spiral, as more and more European countries reported being on the brink of debt default, asking the European Union in financial assistence.

What matters to the United States, especially after our own financial debt crisis, how much exposure the U.S. Banks have in Europe? All large U.S. banks have a European operation. The same banks do not hold much in debt of Greece, Ireland, Spain or Italy, at best having a net exposure of no more than $200 billion. However, what is more relevant, are investments the U.S. banks have (estimated at $1.1 trillion) tied up in large European banks. European banks made loans in the hundreds of billion Euros to Greece and the other troubled European Union countries. As a consequence, in an interwoven world, the U.S. will be directly effected in what transpires in Europe. Should Greece default on its debt, (chances are it will) the U.S. will feel that kick in the behind. On the other hand, the EU may exclude Greece from the union, however, that will likely spell the end of the Euro as well. Either way, we will get shafted (once again).


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