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Lessons from Greece for the U.S.

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After riots raged in the streets outside, the Greek Parliament today approved a highly unpopular set of austerity measures in an effort to deal with the country's severe debt crisis. The move indicates that Greek leaders are finally acknowledging the harsh reality of the situation, but among the citizens of Greece, that reality is proving harder to accept.

For the politicians and citizens of the U.S., the Greek turmoil should serve as a cautionary tale about national debt. The dire problems in Greece's situation raise questions about the optimistic scenario that the U.S. economy will inevitably get back on track, pushing the stock market, savings account interest rates and real estate prices higher in the process.

The Greek dilemma

The dilemma faced by the Greek parliament is a matter of picking their economic poison. The government's out-of-control debt demands dramatic budget cuts, but those budget cuts will further handicap an economy that is already in shambles. As just one illustration of this situation, the new austerity plan calls for 150,000 government layoffs at a time when the unemployment rate is already at 21 percent.

The Greek people lashed out at the new austerity measures with protests by 80,000 and riots that left parts of Athens in flames. As irrational as this reaction may seem, it is important to recognize the element of denial in it that is part of human nature. After all, to the man on the street, defaulting on government debt is a somewhat abstract concept, whereas the lack of jobs is a concrete and immediate problem.

The Greek parliament wasn't wrong to approve the austerity measures -- defaulting on the government's debt would result in extreme budget constraints as well, and with less chance of controlling the process -- but that doesn't mean the country's citizens are going to take the medicine cheerfully.

Lessons for America

All of this is worthy of note here in the U.S. for two reasons:
  • Trouble in Europe could still upset the apple cart for the U.S. economy. Right now, things seem to be progressing smoothly -- growth is picking up and unemployment is easing. The stock market has rallied, and continued prosperity should build support for two areas that badly need it: savings account interest rates and housing prices. However, an economic slowdown in Europe or a new financial crisis resulting from sovereign debt problems could drag the U.S. economy back down.
  • Fiscal responsibility is not always popular. In an election year, politicians want to create the illusion that they can balance the budget without tax increases or spending cuts. Denying responsibility in this way is the same kind of poor leadership that has led to Greece's predicament.
  • In the end, economics will impose its will on a situation regardless of popular sentiment. The Greeks are facing this harsh reality now, and it is a lesson that should not be lost on the people and government of the U.S.

    The original article can be found at Money-Rates.com:

    "Lessons from Greece for the US"