Serious trouble is brewing across the Atlantic. After decades of trying to integrate the historically sovereign economies of the European continent, the Union once touted as the counter-weight to the United States is on the verge of spectacular collapse. In one last twist of fate, the final straw appears to be the weight of democracy.
Although the logic of stringing nearly two dozen incredibly diverse and structurally divergent fiscal governments together via one common currency was always difficult to work through, the time apparently nears where the experiment will have run its course.
Greece, among many of the EU countries, has been living a fiscally unsustainable life for a good while now. With an economy fueled predominantly by tourism and minor agricultural exports, Greece was living high on the Trojan horse until the collapse of 2008 swept in harsh realities. Greek public debt as a percentage of its GDP has increased from 107% in 2007 to an economically-stagnating 145% in 2010. 2012 forecasts project as much as 180%. So Greece, like far too many other nations, has been borrowing far too much to finance its standard of living. Sound like home yet?
The problem is that Greece shares a currency with 21 other 'independent' countries and cannot independently print more money....I mean implement a quantitative easing program of their own. They require real loans from real banks. Tied to real strings. Meaning no more cushy public jobs, paid for by German taxpayers. No more public officials retiring at 50 with large pensions for life.
Last week a late deal was reached to provide a bailout to Greece in exchange for austerity measures imposed upon the Greek fiscal house and a European oversight commission telling the Greek government what it can and cannot do. Stock markets around the world rose on the news that new money would back bad Greek debt, even at reduced returns. The media spun a story that the EU was saved. Until this week.
Greek Prime Minister George Papandreou responded to the deal by calling for a Greek popular vote on the deal. He said the people need to decide on the future of Greece in the European Union. This of course sent stock markets around the world plunging. Why? Because new money financing bad debt was now placed in jeopardy as it is unlikely the Greek people are going to vote in favor of a deal that cuts their cushy standard of living in any way and hands over their government to politicians in Berlin, Paris or Brussels.
The failings of Europe are not isolated to their continent. The same situation is playing out at a slower pace here in the United States. We too have a collection of near-autonomous governments spending money at varying paces. Some states are perilously close to default, requiring massive injections of federal taxpayer money to finance its unrealistic obligations.
The state of California is trying to build a high-speed rail system that has now tripled in projected costs to a staggering $98 BILLION from what was approved in a voter referendum and the planned 20 year construction has not even yet begun. This in a state with a $25 BILLION budget deficit each year. When a bailout of California is inevitably required, it will be the taxpayers of the other 49 states that foots the bill.
What happens when states with sound fiscal houses object to spending their hard-earned and well-managed money on systems that are financially insolvent? What happens when people are forced to take 50% cuts on their promised government pensions and benefits? What happens when people take over governments with the intention of spending as much money as possible to buy political coalitions at the expense of solvency?
We are starting to see the results across the pond and the conclusions will not be pretty.