To answer the question, consider what brought Greece to where she is—running a deficit of 14 percent of gross domestic product with a debt approaching 100 percent, with Portugal, Spain, Ireland and Great Britain not that far behind.
How did this happen? Protected by the United States through a half-century of Cold War, Europe cut back on defense and ratcheted up spending for La Dolce Vita.
All of Europe adopted universal health care. All voted in a shorter workweek, a higher minimum wage, greater job security, earlier retirements and munificent pensions.
As the cradle-to-grave welfare states rose, an ever-increasing share of the labor force left the private sector for the security of the public sector.
Tax-consumers, the beneficiaries of the welfare states and the bureaucrats that ran them, grew in number, as taxpayers declined as a share of the labor force. Though Greece was far from the most productive nation in Europe, Athens led the parade.
After the baby boom ended, the pill arrival in the 1960s. Then came abortion on demand in the 1970s.
The fertility rate of Greece and every European nation fell below the 2.1 births per woman needed to replace an existing population. Greece’s birth rate has been below zero population growth for three decades.
Result: In Year 2000, Greece had just under 11 million people and a median age of 38. In 2050, Greece is projected to have just under 11 million people, but the median age will be 50.
Were Greece a company, the solution would be bankruptcy. But Greece is a country. And a bailout of $141 billion is being put together by the European Union and International Monetary Fund.
Why? Because, should Greece decide not to take a chain saw to her welfare state, but walk away from her debts and default, she would blow a hole in the balance sheets of the biggest banks in Europe. Then the banks would have to be bailed out.
Seeing Greece’s bondholders being burned, terrified holders of Portuguese and Spanish debt would start dumping their bonds, forcing Madrid and Lisbon to pay a higher interest rate both to sell new bonds and roll over the old ones coming due. Rather than savage their welfare state programs, and risk riots in the streets and a massacre at the polls, Madrid and Lisbon, too, might look agreeably at default.
Chancellor Angela Merkel, though exasperated with the Greeks, is urging Germans to back the $141 billion bailout: “Nothing less than the future of Europe ... is at stake.”
Merkel believes there is no alternative. But there is an alternative—a restructuring of Greece’s debt or a default where the holders of Greek bonds suffer the fate of the holders of bonds from Lehman Brothers and General Motors.
Inevitably, this is what is going to happen. For how long will Greeks work longer, retire later and live on smaller pensions, so holders of Greek bonds can get their interest payments right on time?
The EU and IMF may, with the bailout of Greece, kick this can up the road. But the crisis will return. For the nations of Europe have made commitments beyond their capacity to keep, given their growing debts and aging populations.
And America is not all that far behind. While the federal deficit is not 14 percent of GDP, it was 10 percent in 2009 and may reach 11 percent in 2010. Trillion-dollar deficits are projected through the decade, bringing the public debt—held by citizens, companies, foreign governments and sovereign wealth funds—close to 100 percent of GDP.
And the unfunded liabilities of Social Security, Medicare and federal pensions rival those of Western Europe.
States like California and New York, larger than Greece, look a lot like Greece. Were it not for the scores of billions dished out to them by Obama’s stimulus, some of these states would have come close to the brink New York City went over in 1975.
Many of these states are today laying off teachers, letting felons out of prison, and looking hard at the salaries and pensions of civil servants. While the temptation is great for Washington to bail them out again, the United States government itself has now begun to attract the concerned notice of holders of U.S. debt.
That we are witnessing Oswald Spengler’s “Decline of the West” seems undeniable.
La Dolce Vita is coming to an end. The ever-expanding European and American welfare states of the 20th century will contract in the 21st. Some have already begun to shrink. A time of austerity is at hand.
Indeed, what is about to be tested is democracy itself.
Can democracies that attracted universal applause in the golden years of rising expectations impose upon their citizens the enduring and painful sacrifices necessary in a time of retrenchment? We are about to find out.