Unlike the subprime mortgage crisis and the resulting worldwide Great Recession of 2008-2009 that exposed the over-borrowing and over-spending of the private sector, the current sovereign debt emergencies in the Euro Zone are more or less crises caused by public sector imprudence. Uncompromising political realities in many EU nations continue to exacerbate the dilemma. Inflexible labor markets that resist the changes necessary in order to regain world competitiveness are commonplace around the Mediterranean.
Unwarranted high salaries, liberal benefits and low tax rates, all of which are usually created via over-borrowing and over-spending in the public sector, have fostered a culture of entitlement. A sobering sign of pent-up public anger was seen in the civil unrest that took place in Greece immediately after the government announced mandatory austerity measures. The rescue plan's measures included reduced salaries and benefits, yet higher taxes and consumer prices. No doubt, the notion that EU officials set the overall economic policy and the loss of national monetary sovereignty add to the problem. Many Europeans are starting to feel that the problems and associated causes are not theirs alone.
Furthermore, the Greeks have a notorious stereotype for evading taxes, especially those who are well-off. The Greek government announced plans to publish the names of flagrant tax evaders in an effort to shame them into payment. To the same effect, about 47 percent of US households will pay no federal income taxes for 2009, either because their incomes were too low or because they qualified for enough credits and deductions to eliminate their tax liability. It seems governments everywhere are having trouble collecting enough taxes to sustain their agendas.
Many German voters were infuriated when their government reluctantly agreed to participate in the first Greek bailout after taking part in its design. But there is a high probability the Greek debt crisis will reappear, even if the Greek government has the will and the strength to enact the called-for austerity measures. All of this comes at a time when the wealthier EU nations have all but exhausted their economic and political abilities to extend further assistance to needy countries.
Moreover, most developed countries around the world – including the U.S. and China (although China is still a developing nation – the editor) – have aging populations that are not as productive as they once were and are expensive to support. This demographic can be quite outspoken when denied what it considers its rights. Coupled with a government that has promised many generous benefits to all of its citizens while amassing unsustainable debt levels, the result is a recipe for political and economic turmoil. Citizens expect the promises made by their governments to be kept. When they are not kept, radical and often undesirable changes follow. Consequently, it will be quite a challenge for "Club Med" countries to tighten their collective belts by producing more and consuming less.
To summarize, the current political climate in many countries around the world is near boiling point. The same political fallout in Greece and the rest of Europe can be expected anywhere citizens are asked to suddenly consume less and produce more. But that is exactly what must happen to avoid a scenario that will make the recent Great Recession look like a minor inconvenience.
Dr. E. Tylor Claggett is a professor of finance and director of the Financial Planning Track at Salisbury University, US. He is a columnist with China.org.cn Dr. Ying Wu is a professor of economics at Salisbury University, US.