WE COULD HAVE BEEN GREECE
The Greek government is in trouble. Years of spending more than it took in have come back to haunt it. The situation was not helped by the creative accounting used to disguise the problem.
Canada could have wound up a lot like Greece. Back in the 1970's and 80's, our national debt, too, was running out of control. A sudden, self-reinforcing loss of confidence by investors in the ability of our government to pay its debts was becoming more and more likely.
And there were plenty of people arguing that this was just fine and not a cause for any concern.
Fortunately, we had leaders who acted in time. It is true that the Chretien federal government solved its problem in part by downloading it to the provinces through reduced transfers. The provinces, in turn, cut funding to cities.
Cities had no-one to download to except taxpayers. We are still seeing the results in cities being forced, year after year, to raise taxes, cut services, or both. Often, they get more blame for it than they deserve.
But this is still far better than a Greece-type crisis at the federal level would have been.
There are differences between the situation we would have been in and that of Greece today. The most significant is that we have our own currency, while Greece now shares the Euro with most other European countries.
If the world had lost faith in the ability of our government to pay its debts, our dollar would have gone down in value, making us poorer, but also making our exports more competitive.
Our government would presumably have been forced to get its fiscal act together on an emergency basis, cutting spending and raising taxes. There would have been unemployment and protests, just as in Greece today, but the increased competitiveness of our exports would have helped.
Being part of the Euro zone means that the Greek currency cannot go down like that.
All the Greek government can do besides pleading for help is to cut spending and raise taxes just at a time when its economy still needs stimulating if it is to provide full employment. That will surely result in massive unemployment.
But at least EU membership means that Greeks can look for employment elsewhere in Europe. There are still cultural and linguistic barriers, and they may face hostility, but there is no legal barrier.
Compare the situation of Greece with that of China, where the government, before the current crisis, had accumulated a massive fund, largely in U.S. Treasury bills. When the crisis hit, China was in a position to provide plenty of economic stimulus.
And it did just that. China's stimulus package was about 15% of its GDP, while most countries only provided something like 2% of GDP. Also, it got the spending out early, while most governments were still arguing about whether or not there was a crisis.
The result is that China is now booming again, even though the initial impact of the crisis was severe.
Governments are always tempted to run deficits. It allows them to provide programs without raising taxes.
Also, there are times like the present when governments need to run deficits to stimulate the economy.
Opposition parties at both federal and provincial levels are playing the cheapest of cheap politics when they call on the government to stimulate the economy and then criticize them for their deficit.
Deficits are fine now. But it is very important that when the economy returns to normal, our governments also return to running budget surpluses.
Then, next time we need to stimulate the economy to prevent mass unemployment, we will be able to do so like China, and not be hamstrung and powerless like Greece.
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