With all the political news going on in Maine this week, and the surprising lack of coverage of the issue by many American media conglomerates, you might have missed it, but Greece defaulted this week. On Tuesday, Greece missed a debt payment to the International Monetary Fund, which was due at the end of the fiscal year. Now, to an individual, missing a payment on some account or another might not be such a big deal. You get a sternly worded reminder in some form or another, and you might have quite a while to shift or borrow funds to cover the payment.
When a sovereign nation-state misses a debt payment, however, it’s a much more serious matter. In this case, it would be as if all of your debt was owed to one credit card company. Imagine further that this credit card company is, in fact, the only credit card company willing to open its doors to you, and that you have no other way to borrow any money.
Now, the credit card company isn’t entirely unreasonable. They’re willing to give you an extension; in fact, they’ve done it before. However, they demand that you make certain concessions. You’ll need to spend your money a little more frugally and build up your cash reserves so that, eventually, you can pay off the debt.
This was the arrangement Greece had with the European Union before the elections earlier this year. However, in January a bizarre coalition of liberals who hated having to make cuts to government spending and right-wing nationalists who didn’t consider the debt legitimate in the first place took power. That brought us to the standoff we see today, where the Greek economy is essentially shut down and the country is on the brink of economic collapse.
In the United States, we ought to be paying much closer attention to the crisis in Greece. We are in a much better situation fiscally, of course. First of all, our debt isn’t nearly as bad: According to 2014 estimates, Greece’s public debt was 174 percent of its Gross Domestic Product; America’s was 71.2 percent.
The U.S. also has a distinct advantage because we have one of the most stable currencies on the planet. The U.S. dollar is a reserve currency, which means it is commonly used by other nations to hold their debt. This makes it far easier for the United States to build up a massive debt than most other nations in the world. Of course, that could change, but generally such shifts occur gradually over time.
All of this is good news, but shouldn’t leave the United States complacent. Rather than taking advantage of the situation and continuing to run up our massive debt, the U.S. should behave more fiscally responsibly. We should work harder to eliminate the deficit (the gap between revenues and expenses) so that, as a nation, we can begin to pay off our debt (the money owed). We ought to prepare for the eventuality of a shift in the status of our currency, rather than blithely hoping the current status quo will continue forever.
This won’t be easy, of course. We’ll have to make tough decisions to eliminate the deficit and begin paying off the debt. It is likely that any plausible solution will be disliked by both parties, and by Americans of all political stripes. As we’ve seen recently in Augusta, a product rushed to market under pressure is inferior to a well thought out plan. We can avoid finding ourselves in that kind of fiscal crisis as a nation, but only if we begin working on solutions now, before it’s necessary, rather than after the fact. Let’s learn from the problems facing Greece, rather than trying to emulate them.