Are we on the Greek road to ruin? Because of its unpayable government debts Greece is experiencing riots, economic depression, massive long-term unemployment and even a potential loss of sovereignty. Will unfunded entitlements eventually visit the same misery on the United States?
Greece’s loss of competitiveness combined with its membership in the euro, a currency it shares with most other European nations, is a prime source of the country’s economic pain. Laborers in Germany, for example, have become more and more productive relative to Greek workers. This means that if relative wages don’t change, hiring a Greek becomes a steadily worsening deal for employers.
And since wages make up a big chunk of the cost of producing everything, static relative wages make Greek exports less attractive compared with German goods.
Normally, when a nation’s workers become less competitive, the country’s currency falls in value, effectively cutting workers’ wages. Lower effective wages increase the gains of hiring the workers and decrease the cost of producing goods destined for export. But because Greece doesn’t have its own currency, it can’t do this. Greece still wouldn’t have such a big problem if its employers could cut wages, but labor market rigidities often prevent this from happening.
The United States has its own currency that can fall in value. But the relevant comparison isn’t between Greece and the entire United States, but rather between Greece and individual U.S. states such as California. If California’s current economic troubles continue and its average relative wages don’t fall, California will become increasingly less
competitive. If this happens and the state’s government doesn’t cut spending, it will face a Greek-like repayment crisis.
But the ease with which residents of California can move to other states would greatly mitigate any problems — a California worker priced out of the labor market could just move to Arizona. In contrast, although Greeks are legally free to move to any other nation in the European Union, language and culture barriers often prevent this from happening.
Much of the pain of Greece’s economic troubles will probably be felt by retired senior citizens who will end up receiving lower government benefits. California seniors, in contrast, mostly get their benefits from the federal government, although a California crash could endanger former state employees’ defined-benefit retirement plans. In sum, however, much of Greece’s economic woes are caused by the kind of currency problems that will never plague the U.S.