Why We Worry about P.I.G.S.

Washington Post columnist Robert Samuelson writes about Greece's acute debt crisis. In 2009, its government debt was 113% of GDP. The budget deficit for 2009 was 12.7% of GDP. Two-thirds of Greek debt is owed to foreigners.

Greece is a euro country, and any Greek default would undermine market confidence in other euro countries' ability to service their debts, especially the other “P.I.G.S.”--Spain, Portugal and Ireland. Serial defaults would threaten the global economic recovery.

Samuelson shows how the euro contributed to the crisis. Greece borrowed at low interest rates, because nobody believed the euro bloc will allow one of its own to default. Of course if Greece does default, the guarantee will vanish and trigger a flight from many other countries' debt.

While the most discussed remedy to Greece’s debt crisis is to force the country to cut spending drastically, Desmond Lachman of the American Enterprise Institute argues that any forced austerity would be too punishing. Greece would need spending cuts and tax increases equal to 10% of GDP, which would generate a savage recession worsening existing unemployment, already at 10%. "No sane country is going to accept that," Lachman says.

According to Samuelson, the issue is far larger than Greece. It threatens almost every advanced welfare state—the United States, Britain, Germany, Italy, France, Japan, Belgium and others. All face some combination of huge budget deficits, high debts, aging populations and political paralysis. Current deficit spending may aid economic recovery, but its persistence truly threatens long-term prosperity.

Michael Barone notes most Americans are dismayed by Obama’s and congressional Democrats’ big government programs, along with the specter of federal budget deficits that will soon double the national debt as a percentage of GDP. Democrats’ problems mean Republicans should soon have a mandate to cut spending sharply. But Barone cautions spending cuts can be politically perilous. The Economist last week issued a similar warning.