Free Slides from Ed Dolan’s
Econ Blog http://dolanecon.blogspot.com/The Greek Budget Crisis:Some Comparisons with the United States Post prepared March 7, 2010 Note: This slideshow has been updated as of April 4, 2013. Follow this link for the updated version: http://www.slideshare.net/dolaneconslide/whyTerms of Use: You are free to use these slides as a resource in your economics classes together with whatever -hasnt-the-us-become-another-greece textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers. Check Ed Dolan’s Econ Blog regularly for more slides like these.

Greek Budget Crisis Threatens Euro
Area With a government deficit over 12 percent of GDP and total government debt of more than 100% of GDP, Greece has the worst fiscal policy performance in the European Union Greece is a member of the euro currency area, so it cannot devalue its currency or resort to inflation to escape the crisis A default by the Greek government would threaten financial stability in all euro area countries Source: PDClipart.org Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

What can the US learn
from the Greek crisis? The United States also faces unusually high government deficits and debt How do the two countries compare in terms of key fiscal policy indicators? Does the Greek budget crisis hold any lessons for the United States? Source: PDClipart.org Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Deterioration of Government Finances: The
Deficit In 2009, both countries had government budget deficits of near than 12 percent of GDP The United States had a government surplus as recently as 2000 Its finances have deteriorated even more rapidly than those of Greece Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Deterioration of Government Finances: The
Debt Greece entered the crisis with a much larger government debt than the United States During the boom years of the mid- 2000s, Greece began to reduce its debt burden, but progress was reversed as the economy slowed In the US, debt continued to grow faster than GDP even during the most prosperous years of the boom Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Analysis: Cyclical Component of Deficit
The cyclical balance measures the difference between the actual deficit and the deficit that the country would have at full employment A negative balance (a cyclical deficit) shows that the actual deficit is greater than it would be at full employment In both Greece and the US, about two percentage points of the total deficit, as of 2009, was attributable to the recession Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Analysis: Contribution of Spending to
the Deficit During the early 2000s, government expenditures trended downward in Greece, but upward in the United States In both countries, fiscal stimulus spending added significantly to the deficit in 2008 and 2009 On balance, rising expenditures contributed a bit more to the growing deficit in Greece than in the US Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Analysis: Contribution of Taxes to
the Deficit The tendency of tax and nontax revenues to rise during a period of prosperity is an important automatic stabilizer that helps control the business cycle and keep fiscal policy under control In both Greece and the US, this automatic stabilizer was weak. Tax receipts were lower during the boom years of the mid-2000s than they were at the previous business cycle peak in 2000. On balance, falling tax receipts contributed a bit more to growth of the deficit in the US than in Greece. Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Interest Payments and Pressure for
Reform Interest payments are a much larger contributor to the budget deficit in Greece than in the US In part, Greek total interest cost is higher because debt is larger In part, it is higher because Greece does not enjoy the confidence of lenders. As of early 2010, Greece was paying interest rates that were more than twice as high as those paid by the US government Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Greek Government Makes Painful Budget
Reforms As fear of a default rose in early 2010, Greece came under enormous pressure to tighten fiscal policy A package of expenditure cuts and tax increases is projected to sharply cut the Greek budget deficit in 2010 and 2011 No similar changes are in store for US fiscal policy. Without tax or spending changes, the US deficit is expected to shrink only slightly Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Lessons from the Greek Crisis
(1) When lenders begin to doubt a country’s solvency, interest rates and debt service costs soar out of control At that point, a government has only Fiscal reforms in Greece . . . three choices:  Salary cuts for  Default on its debt government workers  Monetize the deficit at the risk of  Pension cuts runaway inflation  Tax increases  Undergo painful fiscal reforms The results . . . As a member of the euro area, the  Strikes default and inflation options were not on  Violent street the table. Greece was pressured by its demonstrations neighbors to choose reform, however painful Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Lessons from the Greek Crisis
(2) The middle of a recession is the worst time to make fiscal reforms. Better to do it during a period of prosperity The US has time, but not much, to make reforms before the next recession comes Without big changes in tax and spending policy, the debt is certain to grow out of control, and it will be too late for relatively painless solutions US debt projections by the Congressional Budget Office With business as usual With reforms that have been promised, but not yet delivered Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/