Euro crisis? Not for us, thank you

This blog first appeared in the Times of Israel on June 21, 2012.

“If Israel were in Spain’s situation, Heaven forbid, no body or state would inject 100 billion euros to help us out.”

Such were the wise words of our finance minister, Yuval Steinitz, this week, just hours after Spain’s banks were assisted out of their little troubles with a 100 billion euro rescue package (Spain so downplayed the occasion that the Spanish prime minister made no statement until a day after the bailout, after which he hopped on a plane to watch the football in Poland).

So, thank you Mr Steinitz. That makes at least three people now (him, my neighbour from across the landing, and me) who understand that Israel is in no position to gloat while others are capsizing. There’s a mood in the country that, “Well, we managed to weather that storm, well done to us for keeping far away.” Now, that may be acceptable thinking by your greengrocer or reflexologist. But anyone in politics, and I mean all 120 damage-wielding, overpaid members of Knesset, should congratulate themselves less on missing the boat and think more along the lines of, ‘Would we have fared any better had we been on the boat?’ and ‘How sure are we that we won’t hit the same storm ahead?’

There’s a Greek tragedy playing out before our eyes, and the drama is spreading across the continent. The Greek populace, facing stark austerity plans, is up in arms, the Spanish banks are reeling, the Italians are poised on the brink, and the Germans are rattled at the bill that they—and largely they—will have to pay to save the day.

Once upon a time (about 20 years ago actually), some European countries got together to work towards a more unified economic bloc, bound together by a single currency. The Maastricht Treaty, that paved the way for this union, set targets for individual member countries on such measures as inflation, government budget deficits, and public debt. For example, the budget deficit (how much more a government spends than it receives in any given year) shouldn’t be more than 3% of the previous year’s GDP and public debt (total debt owed by the government) shouldn’t be more than 60% of GDP.

So how comes Greece has come a cropper? Its economy, now contracting fast, has been on the rocks for a while. Its unemployment is very high, heartbreakingly so among the young. All of this has led to a budget deficit of 10% or more (compared to the 3% in the Maastricht rules) and public debt soaring to…. wait for it…. a colossal 161% of GDP in 2011.

Greece is often referred to as “a poor country of rich people”. Indeed Greeks have an aversion to paying taxes or contributing to the common good and now it’s coming to haunt them.

And now for the Israeli smugness: Our economy isn’t contracting, it’s not even sluggish. Our budget deficit last year was 3% and our public debt has contracted to a decent 75%. We may grumble about taxes–who doesn’t?–but we do pay them.

So should we be patting ourselves on the back?

Not yet.

It has long been held that in good times a government makes a budget surplus (i.e. takes in more money from taxes than it spends) and in bad times, it does the opposite. In other words, when times are good, a government puts something aside for that inevitable rainy day.

The underlying logic is simple: the burden of spending should fall fairly across generations (quote from a UK government document, which must be up there on the best-sellers list, just after Jackie Collins). In other words: all public consumption benefiting the current generation should be paid for by that generation.

The trouble starts when you abandon this philosophy, and start spending money you don’t have, pushing the bill onto your children. It’s what the US has been doing for years, and UK, Greece, and others in Europe have practiced in the past decade or so.

And Israel? Well worryingly, we’re heading in that direction too.

While Europe has been reeling from recession, Israel has indeed notched up impressive economic growth rates of 4.6%, and 4.8% in recent years. But at the same time it’s borrowed, with budget deficits nudging 4% of GDP, when according to traditional theory, the government should have been recording surpluses. If you can’t make a surplus when your economy’s growing by over 4%, when can you?

Our politicians would do well to read Aesop’s fable of the Ant and the Grasshopper. Because it’s been a wonderful summer, and we’ve been singing (our own praises) when we should have been preparing for the hard times ahead.