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Why the U.S. Is Worse Off Than Greece

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Little old Greece made news again this week following the announcement of a $145 billion rescue package for the country (courtesy of the EU and IMF). Although this money will see the country through its May 19 debt maturities, the bond market remains skeptical of Greece's long-term solvency. And rather than solve for the market's worries, it seems to have actually exacerbated them. That's because investors, due to the tightened ties between Greece and Europe, now fear contagion -- a series of sovereign defaults in countries such as Portugal and Spain that would threaten the economic stability of the entire region.

This is why foreign stocks got rocked on Tuesday with even megacap defensive European names such as Telefonica (NYSE: TEF  ) , Unilver (NYSE: UL  ) , and France Telecom (NYSE: FTE  ) all down more than 3%. But is it so bad that an indiscriminate sell-off of Europe is warranted?

The plan! The plan!
Standing between the present and that looming financial apocalypse is Greece's "Economic Policy Program relating to the Eurogroup and IMF support mechanism." This, more succinctly, is Greece's austerity plan -- the measures it needs to put in place to get its debt and deficit under control and remain eligible for EU and IMF loans -- and it is aggressive.

Here, however, is the good news. Unlike most government plans (I'm looking at you, U.S. federal budget), Greece's plan is front-loaded and based in realistic assumptions. This isn't to say Greece won't encounter resistance or even that it will ultimately be able to pull it off, but rather that the plan, at the very least, is not doomed from the outset.

What's expected of the Greeks
Greek austerity efforts are forecast to be a whopping 9% of GDP in fiscal 2010 and aim both to cut spending and raise revenue. On the revenue-raising side, Greeks can expect an increased VAT tax, increased sin taxes, a widened tax base on property and luxury items, windfall taxes on profitable businesses, and a major crackdown on tax evasion. It's this last effort that has the potential to move the needle most for the Greek budget. The Greek government at present collects just 4.7% of GDP in personal income tax -- a little more than half of other European countries despite comparable tax rates.

In terms of spending cuts, the country is staring down freezes and cuts in public sector salaries, allowances, and pensions as well as restrictions on procurements. For a country that sacrifices up to 8% of its GDP annually to nepotism, cronyism, and bribery, according to Daniel Kaufmann of the Brookings Institution, this could also make a real difference.

Here's what I mean
In most cases, of course, these plans and projections would be just about worthless. That's because most governments build their financial models from ridiculous assumptions. Take, for example, the U.S. government budget for fiscal 2011. Its 10-year deficit reduction goal is a relatively modest $1.2 trillion, which would cut our annual deficit from 5% to 4% of GDP annually.

Yet even this forecast is based on a real GDP growth forecast of 4.3% in 2011, 4.3% in 2012, and 4.2% in 2013. To put this in context, the U.S. has not sustained better than 4% GDP growth for three years since the three-year period ending 1999. You may remember that as the top of the dot-com bubble -- a temporary boom that ended as a ridiculous bust. Prior to that, it was the three years ending 1985.

In other words, maybe we're due. More likely, the federal budget is far too optimistic. As Christina Romer, head of the White House Council of Economic Advisors, said in a live chat at the time of the budget release, "all forecasts have to be understood to be subject to substantial margins of error."

And yet!
Despite this acknowledgment of substantial potential margins of error, our country is staring down serious financial consequences should we not sustain 3.3% annual GDP growth between now and 2020. In fact, according to the sensitivity analysis included in the White House's own budget, we will add more than $3.1 trillion to the national debt should annual GDP growth through 2020 check in at 2.3% -- just one percentage point lower.

How likely is this to happen? After all, 3.3% real annual GDP growth is roughly the historical U.S. average.

According to a recent paper from the Bank of International Settlements, GDP growth falls one percentage point annually when a country's debt reaches more than 90% of GDP. The U.S. is currently at 87.3%. That number will be over 90% by the end of this year or next, making 2.3% GDP growth over the next decade much more likely than 3.3% GDP growth given that 3.3% was the average when the country was not weighed down by debt. This fact, if you're concerned about fiscal responsibility, should have you headed to the restroom. And it just goes to show how so many well-intentioned government plans are doomed by optimistic, unrealistic assumptions.

Why Greece's plan could work
With that as background, let's take a look at the assumptions underlying Greece's plan. Thanks in all likelihood to IMF assistance, Greece's key macroecomic assumptions are realistic. It assumes a 4% decline in GDP in 2010, a 2.6% decline in 2011, and mere 1.1%, 2.1%, and 2.1% increases, respectively, in 2012, 2013, and 2014.

This is not outrageous. If Greece's plan is to fail, the culprit will not be unforeseen deteriorating macroeconomic circumstances that conveniently for politicians cannot be blamed on them. Rather, it will be because the government lacked the political will to see through its efforts. This is one reason why Greece is, in part, better off than the U.S. It has admitted its problems and, though it will be difficult, is attempting to solve them within a realistic framework. Such a radical approach has yet to dawn on our own U.S. government, and we can only hope that it does so sooner rather than later.

But leaving the U.S. aside for the moment, I'm inclined to give the Greek plan the benefit of the doubt for the time being. This makes European blue chips such as those mentioned at the top of this article a fertile hunting ground for potentially oversold stocks.

Get Tim Hanson's Global View column every Thursday on, or by following him on Twitter.

Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. Unilever is a Motley Fool Global Gains pick. France Telecom and Unilever are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (19) | Recommend This Article (79)

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  • Report this Comment On May 06, 2010, at 11:12 AM, bigcat1969 wrote:

    Look at other EU countries the IMF has 'helped' (Romania,Latvia and Hungary), they are missing targets because GDP has crashed and burned. Greece will do the same.

    To continue the US - Greece thing, imagine that the US added a national sales tax of say 5%, cut unemployment off after 26 weeks instead of 99, capped its government medical and drug programs for the needing and retired, cut public servants' wage by 10% and cut government spending by 250 billion for each of the next four year. This is would likely be something like the measures the IMF would demand of the US if we went to them as Greece did.

    What would this do the the GDP of America? The sales tax would hurt retailers and consumer spending, a whole lot of folks living of unemployment would suddenly be forced look for jobs in the low end job market, which is generally what is rebounding, or lose the house if unemployment ran out after 26 weeks, a cap on government cash to medical companies would crash those stocks, and cutting wages for government folks would cut the buying power of a large % of Americans and again hurt the economy. The GDP would crash, housing prices would fall as foreclosures skyrocketed, high end retailers would go bankrupt and the stock market would again 'correct' with drug companies leading the way.

    So why is Greece any different than the US? Why would the GDP not head down dramatically as Greeks have less money to spend and the government is forced to put ever more money out the door to pay a 5% interest rate (the US pays much less) on a huge debt load?

  • Report this Comment On May 06, 2010, at 11:41 AM, BMFPitt wrote:

    I threw some spare cash into a 3X bear treasuries ETF the day that the Fed's buying program "ended." Yet I always underestimate the sentiment of people to see us as the lesser evil when compared to anything else. Still, I can't see how yields won't go way up in the next year or two no matter how bad things get in other places.

  • Report this Comment On May 06, 2010, at 12:17 PM, altruria wrote:

    You can NEVER NEVER NEVER spend yourself into prosperity!!!!

  • Report this Comment On May 06, 2010, at 12:25 PM, TMFMmbop wrote:

    Here's a link to a condensed bibliography of some of the sources used in the writing of this article:


  • Report this Comment On May 06, 2010, at 1:47 PM, hbofbyu wrote:

    Yes, you CAN spend yourself into prosperity. It is easily done by having your debt payed (forgiven) by someone else (EU and IMF) or by future generations (America). Politicians have no concept of thinking long term.

  • Report this Comment On May 06, 2010, at 2:24 PM, kehsef wrote:

    Here's an article from today 5/6/2010 claiming that the Greek crisis is manufactured, which gives us less cause to be concerned about lessons from the US - except for the continued need to control hedge funds.

    Who's manipulating the Greek crisis?

    Greece won't go bankrupt, but there are those who want you to think it will.

    Dr. Ehud Kaufman 6 May 10 20:24

    In the past few months, the world has been watching the economic crisis unfolding in Greece. Most of the voices in the global discourse about the crisis foresee far reaching consequences for Europe and the world. I must dissociate myself from those voices and say that such prognostications are not based on Greece's real difficulties. There is no denying that Greece ahs substantial fiscal problems. However, at the same time one must remember that the European monetary union has political opponents that are now playing their hand and aspiring to its collapse. No less importantly, one must remember that financial speculators are also players, among them the big investment houses and hedge funds. They gain from instability, and if they can manage to direct it, they rake in huge profits.

    Greece's macro-economic numbers are bad, but they certainly do not point to inevitable insolvency. To bolster the impression that the crisis is big and unavoidable, the public and media discussion of the crisis in Europe has been spiced by stereotypical characterizations of the Greek people as lazy, corrupt, devious, and indulged. All this supposedly demonstrates that the situation will only deteriorate, and that Greece is incapable of coping with its difficulties.

    So what is real in the crisis in Greece, and what is blown out of proportion by interested parties?

    The facts

    The global crisis has sharpened the political debate between fiscal conservatives and their opponents. The debt-to-GDP ratio together with tax reductions are the sacred duo of conservative economics.

    It is not surprising that the rating agencies, which are US companies the problematic nature of whose ties with Wall Street has recently been exposed, use the debt/GDP ratio as the most important figure, almost to the exclusion of all else, in their sovereign rating reports.

    Greece's debt/GDP ratio is the highest in the euro block, at about 115%. If a debt/GDP ratio of 115% heralds insolvency, then Japan (190%), Singapore (120%), and Italy (117%), are in similar straits. On the other hand, Portugal (77%) and Spain (50%) are in better shape than Israel.

    Furthermore, the debt/GDP ratio does not reflect a country's ability to pay its debts by raising taxes (mainly on the wealthy), and not just through spending cuts that harm growth. In this respect, Greece actually has considerable room for maneuver, because of low tax collection rates in the past.

    Even Moody's did not think that Greece could not overcome the difficulties. After it downgraded Greece's debt rating from A1 to A2, Moody's published a report on March 3 (about three months after the crisis began) in which it says that Greece is a wealthy country with a developed and advanced financial system and that it borrows in its local currency, so that any constraint on its ability to raise money is a price constraint and not a quantity constraint. The report goes on to explain in detail why Greece, which up t now has met all its obligations, can reduce its debt at a rate that will restore its fiscal stability. According to Moody's, if Greece needs aid, it is only in order to protect the price of raising money.

    But Moody's report had no impact. The ball was in the court of the media and the CDS market (a derivative instrument representing insurance against insolvency), which is known as a market in which it is easy to distort prices. There is already international consensus on the need through regulation to ban it existence in its current format. The rating downgrade ahead of the date when Greece had to rollover existing loans supplied the interested parties and the speculators with the lever to induce panic.

    When yields on Greek bonds continued to rise, the rating agencies continued to downgrade their ratings, not on the basis of new information, but on the basis of the fall in the prices of the bonds themselves and on the basis of hysteria in the media. According to them "at such high costs of raising money, Greece will find it even harder to meet its obligations." It makes sense.

    The media

    If you want to fan the flames of a financial crisis, manipulation of media coverage is the main means. Media coverage of the debt crisis in Greece not only inflated and accelerated the process; it became a central part of it. The coverage swallowed up the crisis, and the basic facts were almost forgotten.

    The chief reason is that the main providers of information, of which the most prominent are Bloomberg and Reuters, are called "news agencies", but in fact long ago became a platform for the leading players in the financial markets to promote their point of view. The overwhelming majority of the content provided by these agencies originates with interested parties. It's interesting, newsy, but biased.

    When hedge fund managers, big investment houses, and those who work for them directly and indirectly, provide assessments and forecasts, they have an agenda to influence the direction of events. What makes the problem worse is the fact that the news agencies are almost the only sources for investment advisers in all the world's financial systems. They are also the main providers of material for business Internet sites.

    Thus the stance of the leading players is disseminated in the Anglo-Saxon communications media as the basis for the experts' opinions. The unanimity that was the outstanding feature of the coverage of the crisis in Greece was an expression of that bias.


    The antagonists of the euro and the speculators found an ally within the euro block: German populism. From the beginning of the European project, Germans accepted it with mixed feelings. Within a united Europe, Germany loses its uniqueness. But that was precisely the declared aim of the union: when Germany is part of a united Europe, there are no European wars.

    Although Germany is the greatest beneficiary of the European Union and the euro block, the Germans feel that Europe lives at their expense. As the largest economy in the EU, Germany makes the largest contribution to its budget, but the EU's budget is small, about 1% of the GDP of each member state. This expense pales into insignificance in comparison with advantages from which Germany benefits.

    To see how far Germany's populist narrative inverts reality, you only have to remember that the fact that Greece has a trade deficit (for which Greece is guilty) works to the benefit of the other EU countries, and first of foremost to the benefit of Germany, which is the leading exporter to Greece, to the tune of $7.5 billion. Salary costs in Greece (another Greek fault) have financed private consumption in Greece, which has financed German exports.

    The accession of Greece and the "weak" countries to the euro block generated a spiral of rising prices, which brought in train wage rises. One of the reasons is that exporters' prices, chiefly of German exporters, became uniform in the euro block despite the gaps in purchasing power between the populations in the different countries. Again, Germany gains.

    The aid to Greece will not cost the German taxpayer anything. Germany will lend to Greece at 5% while Germany itself raises money more cheaply. Greek recovery will serve the interests of the EO and its member states beyond the common interest in preserving the stability of the euro. Despite this, German nationalistic populism has broken out again in an ugly way, and Chancellor Merkel did not have the courage to tell the Germans the truth.


    Greece will not go bankrupt. Europe will come to its senses and lead a global move to ban the use of CDS instruments for speculative purposes. Europe will probably act to detach itself from dependency on the ratings agencies that are influenced by US financial interests.

    The writer is a former senior banker and was in charge of foreign relations at the Ministry of Finance.

    Published by Globes [online], Israel business news - - on May 6, 2010

  • Report this Comment On May 06, 2010, at 2:45 PM, TMFAleph1 wrote:

    Very weak article by Dr. Kaufman. Here's just one example of a flawed argument:

    "Greece's debt/GDP ratio is the highest in the euro block, at about 115%. If a debt/GDP ratio of 115% heralds insolvency, then Japan (190%), Singapore (120%), and Italy (117%), are in similar straits. On the other hand, Portugal (77%) and Spain (50%) are in better shape than Israel."

    Come, come, Dr. Kaufman. I'm sure you realize that if Japan lacked sovereign control over its monetary policy, could not devalue its currency and depended on foreign investors to the same extent as Greece to finance its deficits, it would have encountered the same difficulties as Greece long ago.

    Alex Dumortier

  • Report this Comment On May 06, 2010, at 3:51 PM, TMFMmbop wrote:

    Adding to that, this is a bold claim that needs to be substantiated:

    "If you want to fan the flames of a financial crisis, manipulation of media coverage is the main means. Media coverage of the debt crisis in Greece not only inflated and accelerated the process; it became a central part of it. The coverage swallowed up the crisis, and the basic facts were almost forgotten.

    The chief reason is that the main providers of information, of which the most prominent are Bloomberg and Reuters, are called "news agencies", but in fact long ago became a platform for the leading players in the financial markets to promote their point of view. The overwhelming majority of the content provided by these agencies originates with interested parties. It's interesting, newsy, but biased."

    I mean, I think the coverage has been unfair to Greece and that major media outlets have gone out of their way to find fringe quotes, but I think that's just because the media likes ratings...not because they're pushing the agenda of some hedge fund cabal.

    But maybe I'm naive.


  • Report this Comment On May 06, 2010, at 4:17 PM, TMFAleph1 wrote:


    I don't even think the media has been unfair to Greece; if anything, they could have been more aggressive in pointing out the imbalances and profligacy that led to this crisis.

    I'm not sure what you would consider a "fringe quote"; however, I think stating that Greece is insolvent doesn't qualify -- that's simply a home truth, as far as I'm concerned.

    Furthermore, this crisis is far from over: A restructuring of Greek debt (i.e. a negotiated default) is now highly likely.

    Alex D

  • Report this Comment On May 06, 2010, at 6:32 PM, WyattJunker wrote:

    I'm so glad that Team Obama rammed thru an expanded entitlement. Maybe by quadrupling the size of medicare and cutting the benefits of those who already have it, the increase in fraud will be offset by longer waiting room times.

    Biden was right. This really is a BFD.

    Greece is like watching the first 30 minutes of Tom Hanks in Castaway while flying on Flight 941.

  • Report this Comment On May 06, 2010, at 9:51 PM, wjweber11 wrote:

    What's the source on the US debt as % of GDP (87.3%) ? All sources I find put it at around 60% for 2009.

  • Report this Comment On May 07, 2010, at 7:36 AM, EuroBob7 wrote:

    I am now beginning to think that Greece will survive this 2010 funding crisis but will seriously think of leaving the euro and devalueing in 2011 when it has to go back and refund its debt. This has a long way to run.

  • Report this Comment On May 07, 2010, at 10:45 AM, skondisetty wrote:

    It's interesting to note the key to Greece's program is both raising taxes and cutting spending. The sacrifice will be felt by all, although probably more by the lower income. For those of us in the US, we need to accept the eventuality of higher taxes and less spending in all areas of the government, including military spending, farm subsidies, education, etc. Our way of life is going to change fairly dramatically and we need to be mentally prepared for it. It doesn't mean we'll be living in shacks with no utilities. But the era of buying that third plasma TV because "you feel like it" will be over. Our problems will only be solved if we all are willing to make sacrifices, rich, middle-class, and poor.

  • Report this Comment On May 07, 2010, at 7:47 PM, park94 wrote:

    Even if greeks have to pay higher taxes to repay the lending, there is no guarantee that they will pay those ridiculously high taxes with less salary. So it's basically the subprime crisis all over again.

  • Report this Comment On May 09, 2010, at 11:59 PM, FutureMonkey wrote:

    There is no way we are worse off than Greece. Come on, the USA has 25% of the worlds net worth shared by only 5% of the population. That is a winning hand. We enjoy some of the highest per capita income in the world as well as a population base substantially below our natural resource base. Not too mention phenomenal intellectual capital and technological advantages. We have an awesome labor force that is willing and able to work harder and longer and more efficiently than any of those European countries, plus MIT, Caltech, JPL, Lawerence-Berkeley Laboratories pumping out genius ideas to solve tomorrows problems. Not to mention we have Bill Gates. Greece hasn't done anything new in 2500 years.

    Sure deficit as percent of GDP has risen, but that is because GDP has been contracting while deficit spending has increased as a necessary response to systemic crisis in the financial sector. To be fair we are also fighting wars on multiple fronts that has doubled defense spending in the last decade.

    We don't need to worry about the deficit or whether or not we can spend our way back to prosperity. We need to earn our way to back prosperity. Now lets turn off CNN, roll up our sleeves, and get back to work.

  • Report this Comment On May 10, 2010, at 2:02 PM, CrimsonXFool wrote:


    Can you please post your sources for this data? I'm quite interested in this topic. You mentioned the following:

    "Yet even this forecast is based on a real GDP growth forecast of 4.3% in 2011, 4.3% in 2012, and 4.2% in 2013"

    Googling for "united states budget forecast fy 2011" didn't appear to produce much of value, however, I did find this CBO Article discussing real budget projections -

    See page 2, 3rd down from top -

    Real GDP

    (Percentage change)

    2011 1.9%

    2012 4.6%

    2013 4.8%

    2014 3.9%

    I realize that this 4 year average is still 3.8%, which is actually higher than the 20 year average you mention. I'm not disagreeing with you, just wanting to know where you're pulling your numbers from...

  • Report this Comment On May 10, 2010, at 3:27 PM, TMFAleph1 wrote:


    See the fourth comment from Tim for a link to a bibliography of sources for the article.


    Alex D

  • Report this Comment On May 14, 2010, at 6:56 PM, bretco wrote:

    Nobody has mentioned Comrade Krugman's article in todays paper (NYT) wherein he posits that we are not like Greece, we are much better off.

    Very interesting to read his spin and compare it with these comments.

    fool vs. Fool

    ya'all know which is which, right ?

  • Report this Comment On May 15, 2010, at 5:05 AM, jan1971 wrote:

    Strong article by Krugman. Don´t forget he is an insider. I wouldn´t see why European countries are forced to cut their deficits below 3% of GDP while the US can keep running deficits of over 10% of GDP. A major part of that money coming from foreign investors including European ones. The Europeans are very stupid to keep investing in the US where they lost so much money in Mortgage Backed Securities and real estate the last 3 years. At the same time they don´t get any respect from Wall Street. I think Europe should choose the China and Russia- policy, base policies on their own interests and forget any old friendship feelings with the US.

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