In recent months, you no doubt have noticed that much of the U.S. stock market’s volatility is somehow related to the debt crises in Greece. When news out of Greece is bad – that is, when it looks as if Greece may not be able to repay its world debts – it has a direct impact on the U.S. stock market.
But why? Why should American investors worry so much about what happens in a small European nation across the ocean?
The answer is two-fold.
First, Greece’s economic fate is largely tied to that of the European Union. There is great fear that if Greece defaults, it may take the rest of the union with it. And that would send shock waves not only across the Atlantic, but worldwide. The European Union represents 20 percent of the world’s Gross Domestic Product. So Europe matters to us.
In fact, as Yahoo’s Jeff Macke points out, China’s economic future largely relies on Europe stabilizing. The magnitude of China’s exposure is such that the IMF offered China unsolicited advice on what the country should do to stimulate its economy in the likely event that the EU drag worsens, Macke reports.
We may not like it, but China’s economy is inextricably linked with ours. So European destabilization could inflict massive damage to China’s economy. The United States would suffer from both developments.
But the second reason to care about Greece’s problems may be even more important. Much of the economic trouble in Greece is related to its aging population that is increasingly dependent on government subsidies. The government is spending more than it is taking in, and without major change that trend will continue.
Does that sound familiar?
The United States is also spending more than it takes in. The population here is aging as well. And the cost of supporting more and more retirees will only increase.
As The New York Times reported, the United State debt is projected to equal 140 percent of gross domestic product within two decades. Greece’s debt, by comparison, equals about 115 percent of its GDP.
Both countries, the Times notes, have a bigger government than they’re paying for.
So look at Greece as a cautionary tale. The U.S. government needs to take measures now to avoid following Greece and Europe into financial crisis. And in the meantime, U.S. investors need to keep a close watch on Greece and Europe as they struggle to recover. Perhaps their success, if they find it, may encourage similar efforts here.