MSN (Jubak): Euro crisis is tip of the iceberg

[Switchgear]

link

Someday the euro debt crisis that started in Greece and spread to engulf Europe will be over.

Politicians in the nations that 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 European Monetary Union limits on debt. They'll figure out how to balance national pride with 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 plunges in the world's stock markets and rampant fears that the world is about to fall back into economic and financial crisis.

Hard to believe but 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 1 in a story that will run for the next two decades. This crisis is only our introduction to the kinds of wrenching changes that virtually every nation's economy will face over the next 20 years.

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 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 one 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 to 2010. Greece showed the same productivity growth as Germany, but wages climbed faster. According to Greece's national collective labor agreement, wages rose 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 those of Spain 28% -- and while Germany's costs increase just 6% and U.S. costs plummet 27% (as they did from 2001 to 2009) -- you can be sure that selling your exports will get harder.

And as Greece was becoming less competitive, it was growing older. In 1971, 11.1% of Greeks were 65 or older, according to the Organisation for Economic Co-operation 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 likely to close in on a third, at 32.5%.

The combination of falling competitiveness and an aging population would be lethal enough -- fewer workers making less-competitive products to support an increasing number of retired workers -- but the Greek government has made it worse. To win voters' support, governments of all parties not only promised those hefty wage increases, but they also promised generous pensions at earlier ages.

To understand the full extent of Greece's debt problem you have to look beyond the current deficit problem. That's bad enough, with the net debt level forecast to rise to 120% of gross domestic product 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, a libertarian think tank, 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 holiday pay or 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 proposed change to a retirement age of 63 from 61 is just a 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, the OECD calculates.

The United States isn't aging as fast. Only 17% of the U.S. population will be 65 or older by 2022, according to projections. China's older population is calculated at just 13% by then, but it's likely to catch up quickly: By 2036, 20% of Chinese are expected to be 65 or older.

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 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 of 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 health care 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 streets 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.

Long article short, you owe it to yourself to make sure you aren't counting on the government for your retirement.

[JMS]

link

Long article short, you owe it to yourself to make sure you aren't counting on the government for your retirement.

Before the American Civil War people said the "United States are". After the civil war people said "the United States is". Took us nearly 100 years and a cataclismic civil war in order to solitify a strong central authority on this side of the pond. Europe has even farther to move.

Europe won't fix their economic house until they have a central authority which is empowered to do so. Why should Greece or Spain suffer by acting responsible when Germany and France who own most of their debt has already telegraphed their willingness to mitigate the concequences of irresponsible borrowing? Europe won't get the central authority she needs, until things get much worse. Even then it's questionable whether Europe will come together, or allow itself to fall appart.

Look for Europe to undergo what Japan did in the 1990's... A troubled economic decade where things continue to spiral down hill.

On a positive note, this means US securities will continue to be a safe haven for European investors... Cheap money for us. Europe's morass doesn't really hurt us much, because after all; Europe like most of hte rest of hte world pursues balanced trade, so it's not like we are loosing out on folks who massively import US goods. Such a country doesn't exist.

[Thiebear]

I say every year or so:

Baby Boomers are going to destroy several countries:

Only thing to save the us other than immigration:

Social Security: 77yrs

Medicare: poverty and under only

from Jan 2009

http://www.extremeskins.com/showpost.php?p=6081578&postcount=9