Someday the euro debt crisis that started in Greece and spread to engulf Europe will be over. Politicians in the 16 nations that currently use the euro will figure out the right mix of carrot and stick to get Greece, Portugal, Spain and other member states to adhere to the European Monetary Union limits on debt. They’ll figure out a way to balance national pride and the clear need for more integrated fiscal systems among the members. They’ll gradually earn back the trust of financial markets and someday we’ll all be back talking about the euro as a rival to the U.S. dollar as a global reserve currency.
Hard to believe right now when the euro’s troubles are driving a plunge in all the world’s stock markets and rampant fears that the world is about to plunge back into economic and financial crisis.
Hard to believe but still true.
Here’s something, however, that may be even harder to believe: The euro debt crisis for all its power to shake financial markets and the global economy is just Chapter One in a story that will run for the next two decades. This crisis is actually only our introduction to the kinds of wrenching changes that every national economy in the world—yes, even China–will face over the next 20 years as the world ages.
The next chapter of euro debt crisis story is a crisis coming to a nation near you.
And let’s hope the next chapter suggests that there’s an ending to this story that doesn’t involve riots in the street and the long-term decline in living standards for entire national populations.
Let’s hope. But the lesson from the euro debt crisis is that it’s not going to be easy. It may not even be possible.
You probably don’t think of the euro debt crisis as part of some larger global story that is going to pull you and your family in as starring characters. But it is. This isn’t just a story about some feckless Greeks who went on a wild shopping spree with money lent to them by hard-working German’s who didn’t bother to check the books any too carefully. (But, of course, it is that story too.)
Some basic economics make the Greek crisis universal.
From the first quarter of 2001 to the third quarter of 2009 unit labor costs in Greece—that’s how much a worker earned for producing one unit of something—rose by 33%. That’s a 33% increase in the cost of producing one gimcrack in Greece after you’ve deducted all the benefits of any increase in the productivity of Greek workers. In other words if a Greek worker went from making 1 gizmo an hour to making two an hour and got paid twice as much for that hour, the unit labor cost increase would be 0%.
Greek productivity did climb—at an average annual rate of about 2% from 2000-2010 Greece showed the same productivity growth as Germany—but wages climbed faster. According to the National General Collective Labor Agreement, wages rose by 6.2% in 2006 5.4% in 2007, 6.2% in 2008, and 5.7% in 2009.
The result was that Greece priced itself out of global export markets. If your unit labor costs climb 33% while those of Italy go up just 30% and Spain 28%–and those in Germany climb just 6% and in the United States unit labor costs from 2001-2009 fall by 27%–you can be sure that selling Greek exports is getting harder and harder.
At the same time as Greece was getting less competitive, it was also getting older. In 1971 11.1% of Greeks were 65 years old or older, according to the OECD (Organization for Economic Cooperation and Development.) By 2001 that was up to 17%. By the end of 2009 18.7% The OECD takes its estimates out all the way to 2050. By 2031 25% of Greeks will be 65 or older. By 2050 the figure is closing in on a third at 32.5%.
The combination of falling competitiveness and an aging population would be lethal enough—How are fewer workers making less competitive products going to support an increasing number of retired workers?—but the Greek government made it worse. To win voters’ support governments of all parties didn’t just promise those hefty wage increases of 6% a year, they threw in promises of generous pensions at ever earlier ages. (And resemblance between the doings of Greek politicians and those of the folks who run states like California, New York, and New Jersey is purely intentional.)
Before the crisis, for example, a Greek civil servant employed before 1992 could retire after 35 years on the job if they’re 58 or older. And the pension benefit is 80% of pre-retirement salary. The legal retirement age for all workers was just 61 before the crisis. In reaction to the crisis the current government has proposed raising the retirement age to 63. (No wonder German taxpayers are steamed at the idea of having to fund a Greek rescue plan. The German retirement age is already at 67. For more on how German politics are making the crisis worse, see my post http://jubakpicks.com/2010/05/19/germany-makes-the-euro-crisis-worse/ )
To understand the full extent of Greece’s debt problem you have to look not just at the current deficit problem. That’s bad enough with the net debt level forecast to rise to 120% of GDP this year.
But you have to add in the value of all those promises made to the retired and soon to be retired. Economist Jagadeesh Gokhale in a report for the Cato Institute calculates that adding the value of the liabilities in those promises brings the level of government liabilities to 875% of GDP.
Greece can‘t pay that bill by cutting public sector wages, eliminating extra bonus months of holiday pay, and the like. Yes, the government will have to impose drastic spending cuts and tax increases, but it will also have to massively renege on those retirement promises.
I mean massively renege. The current change to a retirement age of 63 from 61 is just a very modest down payment.
Greece isn’t alone in Europe in facing this long-term problem just as it isn’t the only country in Europe with an unsustainably large current deficit. All of Europe is aging: 21% of the French population will be 65 or older by 2022 and in that year 24% of Germans will fall into that demographic category.
The United States isn’t aging as fast. Only 17% of the U.S. population will be 65 or older by 2022, the OECD calculates. China is just at 13% in that year but it catches up quickly: by 2036 20% of Chinese will be 65 or older. (Looking for youth? Try India where only 7.1% of the population will be over 65 in 2022 or Brazil at 9.3% in 2022.)
And Greek politicians weren’t alone in promising future benefits to voters. The average burden of debt plus liability for pension and other social service promises averages 434% of GDP across the European Union. France, with its relatively generous social benefits, comes in at 549%. The United Kingdom stands at 442% and Germany at 418%. Spain, which has a bigger current deficit but relatively modest promises to its citizens, shows up in Jagadeesh Gokhale’s calculations at 244%.
And the United States? By these calculations the debt plus promises burden comes to 890% of GDP. Move over Greece. Who’s your Daddy?
Now governments could take the next decade or two to plan ways to meet or shirk this burden. Countries could set a schedule for raising the retirement age so that everyone would know what was coming and could plan for it. More generous incentives for private savings for retirement and retirement healthcare could help make reductions in government funded pensions less punishing. Subsidies could give some retirees incentives to choose less expensive retirement housing.
Governments could do that.
But the evidence of the Greek crisis is that they won’t. Politicians in Greece didn’t take action until the country’s back was to the wall and they had the cover of a crisis to excuse their cuts to wages and future promises. It’s sad to think that a country’s leaders would prefer riots in the street to proposing painful measures before the situation reaches a crisis, but that’s the conclusion I draw after watching how the Greek crisis has played out.
The transition that I’m describing from a world of glorious promises to an admission that we can’t pay for the promises to a long period of reneging on those promises would be painful enough if carefully planned and managed. But without that planning, I think we’re going to see most—but not all, I hope—countries lurch from crisis to crisis as governments downsize their promises to fit an aging world. (For more on how Europe’s politicians see a falling euro as the way out, see my post http://jubakpicks.com/2010/05/18/why-the-euro-is-headed-to-1-10-politicians-see-its-the-easy-way-out-of-the-euro-debt-crisis/ )
I don’t know how this story comes out. But I know that the Greek chapter has only introduced us to the characters and plot twists that we’ll see over and over again in the next twenty years.