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Greece’s Financial Crisis

Tragedy or farce?

Mar 8, 2010, Vol. 15, No. 24 • By IRWIN M. STELZER
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But we have been warned by the rating agencies that continuation of the triple-A rating granted our government’s debt is no longer certain, and that unless we mend our profligate ways, we will have to pay more to borrow, with a crippling effect on our ability to return to historic growth rates. Worse still, just as euroland countries are faced with the prospect of taking Greek debt onto the area’s balance sheet, our federal government is increasingly faced with the prospect of having to take states’ debt onto the national balance sheet, either by lending states money or by sending more and more funds from Washington to state capitals to prevent defaults.

“Drop Dead, New York,” and California, and Illinois, and Michigan are not headlines President Obama wants to take into his reelection campaign. Unlike the eurozone, the United States is a federal as well as a monetary union. If things get bad enough, the powers that be in Brussels can tell Greece to shape up or ship out—abandon the euro and start printing drachmas again, lots of them. Tempting as that solution might be to solvent American states that have avoided the regulatory and tax excesses of, say, California and New York, abandonment is not an option. Berlin can tell Athens it will let it default rather than bail it out; Washington can’t say that to Sacramento or Albany. Pity. The rating agencies know that, and are adding state debt to federal debt during their reviews of America’s financial health. 

We will know soon how the Greek tragedy ends. My guess is that Greece will muddle through, with investors assuming that Greek debt has the implied backing of financially stronger euroland countries. But Greece will have to accept a loss of sovereignty, as its fellow euroland members demand a say in its spending and tax plans—rather as our bailed-out banks have had to accept supervision of bonuses by the government, and bailed-out auto companies will now have to produce the sorts of cars politicians deem in the public interest. He who pays the piper .  .  . well, you know the rest.


Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of -economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).



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