Greece Crisis: Dress Rehearsal for U.S. States?

March 8, 2010

The Greek government recently adopted a package of tax increases and spending cuts (split roughly half) to reduce its budget deficit from nearly 13 percent to about 9 percent. The Greeks hope that the European Union will take that as enough progress and guarantee its debts or at least provide some cash. Default is a likely outcome otherwise. The EU is discussing the establishment of a European Monetary Fund to manage the bailout-reform process in the future.

The austerity plan has been politically unpopular in Greece with the beneficiaries of high spending and lax tax enforcement, although polls show a large majority felt that it had to happen eventually given tax evasion and overpaid government officials. (Among the items cut is one of their 14 months of pay that civil servants get every 12 months.) Lenders are reportedly getting nervous about sovereign debt, particularly from countries with large budget deficits. Portugal just announced an austerity budget; they usually fall into the “PIIGS” category with Italy, Ireland, Greece, and Spain.

It’s hard not to draw parallels to state fiscal problems. There’s strong evidence that, on average, government employees in the U.S. at all levels enjoy higher pay, greater job security, and significantly more generous pension and health benefits than many of their private sector counterparts. States have to worry not about angry Euro partners but their balanced budget requirements, and default hangs out there as a possibility. (Carly Fiorina, running for California governor, has been mocked for suggesting that the state declare bankruptcy, but the state certainly faces the option of defaulting on its debts.)

Greece, with the proverbial gun pointed to its head, is making moves to begin putting its fiscal house in order. Many U.S. states have done so as well, but there are large exceptions. If a state seeks to push real solutions into future years without coming to grips with their spending, Greece’s plight should be kept in mind.

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