We’ve all had to tighten our belts and limit spending after an overzealous shopping spree. Now, it looks like Greece will have to swallow that bitter medicine as well.
Last year, Greece’s economic crisis sent shockwaves through the eurozone, but things seemed to be looking up after international lenders provided a generous 110 billion euro bailout package. Unfortunately, the Greek government has still been unable to dig itself out of a deep pile of debt. And with a July 15 debt repayment due date quickly approaching, Greece is at risk of defaulting if the European Union and International Monetary Fund don’t come to the rescue with another infusion of cash.
The Sting of Austerity
Prime Minister George Papandreou has proposed a 12 billion euro austerity program that he claims will get the country back on its feet. Until the plan is approved by Parliament, however, the IMF will continue withholding the second bailout that Greece so desperately needs. Papandreou has been pressuring lawmakers to pass the program, but meanwhile, unions and middle-class workers are infuriated.
Austerity measures implemented within the past year have hit the Greek people with higher taxes and a 16% unemployment rate. If the new austerity package is voted through in the next few days, conditions will likely worsen as the government taxes minimum wage earners and further slashes spending. 70-80% of Greeks are opposed to the new austerity plan, and many have taken to the streets to express their outrage. Airports, schools and hospitals came to a standstill this week as workers went on strike, and unions protested outside of the Greek Parliament building, urging lawmakers to oppose the package.
A Contagious Ailment
Greece will become the first eurozone nation to default on its debt if the austerity program doesn’t pass. According to economist Jacob Kirkegaard, this could potentially impact neighboring countries, as well as the entire global economy, an effect he calls “cross-country contagion.” France, Spain, and the U.K. hold a combined $53 billion in Greek debt, and a default could bring devastating losses. Banks will become more hesitant to lend money as the stability of financial institutions is called into question, causing problems for credit markets around the world.
What About Us?
Greece’s bleak situation is all too familiar to the U.S. Pundits have drawn parallels between the possible Greek debt default and the collapse of Lehman Brothers in 2008. The lesson to be learned is that the debt problems of one institution can wreak widespread havoc. Just last month, Congress voted whether or not to raise our own debt ceiling. While the debate is still ongoing, chances are the ceiling will be raised. If not, the U.S. could face a debt default by August, according to Treasury Secretary Timothy Geithner.