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Clive Crook Tells Us That the U.S. Is Not Like Greece--But That Greece Is Like Greece, and That Is Plenty Bad All on Its Own

Laura Tyson points us to Clive Crook, who does a better job than David Leonhardt in asking and answering the question: Is the U.S. like Greece?:

Clive Crook: At the end of last week, the US looked hard at Greece and was scared. So tiny an economy should not be bringing all of Europe low and even threatening to explode the euro, but it is.... What, Americans began to wonder, did Europe’s problems tell them about their own? The cause of the present turmoil, Greek public debt, has aroused fears of a wider sovereign-debt crisis and heightened concern about US government borrowing. More immediately, investors are asking, what if the European Union keeps making a hash of the problem? Will there be a second European banking crisis, and would it infect the US financial system? Even if the answer is no, the US recovery is still fragile. The economy would not be immune to another slump in EU demand.... [F]ears do not have to be well-reasoned to make a bad situation worse and justify themselves...

And Crook answers: No, the U.S. is not like Greece:

The least substantial line of alarm is Greece as fiscal harbinger...

Even California is unlikely to become like Greece:

The US might not be Greece, say pessimists, but California could be.... Could California do for the US what Greece is doing for the EU? Unlikely, is the answer.... [I]ts debts and deficits are puny compared with Greece’s. Other defences and safety-valves, notably lacking in Europe, are to hand...

The real, justified worries are elsewhere:

[T]he greater worry for the US at the moment is not that Europe shows where it is heading but that secondary effects from Greece and any widening emergency will squash its fledgling recovery.... A flight to safety from European markets brings investors back to US bonds and pushes US interest rates lower... depresses the euro, which makes US exports less competitive.... Financial contagion is the other big risk.... Up to now, the US has wanted to think that Greece was a European problem that could be left to the EU to solve. Both parts of that supposition have turned out to be wrong....

The EU-IMF adjustment programme for Greece improves on the previous EU position that Greece must bear all the costs of its troubles alone – but not by much.... [T]he new plan is nearly as delusional as the old one. As Arvind Subramanian argued on this page last week, it implies three years of crippling austerity, at the end of which Greece’s flattened economy will have to support a far larger public debt than today’s. (This is assuming things go well.) The plan resolves nothing. It is a delaying action at best, and a pretty desperate one at that. Default looks ever more likely. This can be planned, with some hope of keeping things orderly – though the best chance of that has now been missed. Or it can be unplanned, after a further period of denial.... The harder question is whether even a Greek default will resolve Europe’s difficulties. My bet would be no. Greece has a huge primary budget deficit. At least for a time after a debt restructuring it would struggle to find lenders. So even with its debts written down to nothing, it faces a period of fiscal austerity that will be wrenching at best and politically impossible at worst – with no central bank to support demand, and no currency of its own to devalue. The EU says that default must be avoided at any cost. I say default will happen. The EU says exit from the euro is not an option. I would not count on that, either. In any event, the US had better brace itself.

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