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Lesson from Greece: Don't spend more than you make

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Sunday, May 9, 2010
 

Greece's problems with money shouldn't seem so foreign.

Anyone with a checking account knows you can't buy more than you spend -- at least not indefinitely, anyway.

"People like to pretend budget deficits and entitlement programs are so complicated and hard to understand," said Craig Thomas, senior economist at PNC Financial Services Group in Pittsburgh. "They really aren't. You have income coming in and spending going out. ...

"Greece shows it's not more complicated than this."

Despite promises of a $146.5 billion bailout from the International Monetary Fund and other countries that use the euro, Greece's deep debts threaten to take down the European Union -- and perhaps jump across the Atlantic.

Rioting by Greeks upset over proposed cuts in wages and public benefits left three people dead last week.

Indirectly, the European crisis caused jitters on Wall Street, adding to a dramatic decline in the Dow Jones Industrial Average on Thursday and instability through week's end. The Dow on Friday ended down 139.89, to close the week at 10,380.43.

The message about Greece's carefree spending translates around the world, economists said. If countries want to provide great social services, that's fine -- but they need to pay for them.

"What is happening in Greece is expected," said Dan Donchev, a private economic analyst in Tetovo, Macedonia, which shares a border with Greece. "Obviously, the time has come when our southern neighbor should pay for its free lunch."

Staff writers Rick Stouffer and Tom Fontaine and free-lance writers Ali Abaday from Turkey and Aleksandar Samardziev from Macedonia contributed.

The bill has finally come for Greece's lunch.

With an economy on par with Massachusetts and smaller than Pennsylvania's, Greece cannot be confused with the United States. Still, its experience is causing wide-ranging effects throughout the world and here in Pittsburgh:

1: Cool down

Other European countries such as Portugal, Italy and Spain might be on the cusp of default, even if they don't face the same imminent danger, analysts said. Fear that the crisis could spread throughout Europe and beyond helped drive down stocks in the United States this week.

Worldwide, more than $2.2 trillion in value at least temporarily was wiped from global stocks this past week.

"It's really nothing but an extension of the existing crisis: You've got big government spending, and now you can't pay it back," said Matthew Marlin, an economics professor at Duquesne University. "Conservative economists have said that all along. You can't fool Mother Nature."

2: Greek tea?

Tea Party protesters in the United States say they are worried their country could end up like Greece.

Economists rate a country's debt as a percentage of its gross domestic product. By that standard, the United States ranks 42nd in the world, at 52.9 percent, according to the Central Intelligence Agency. That's better than Canada and European powers France and Germany, but not as good as China, Russia and oil-rich countries.

Some experts believe the United States could default in the distant future -- if there's no end to systemic deficit spending. The federal deficit hit an all-time high of $1.4 trillion this year.

"Governments have assumed the credit risk of the private sector," said Marvin Goodfriend, economics professor at Carnegie Mellon University's Tepper School of Business. "In that sense, the United States should recognize that the problems Greece is facing, and Europe more generally, could become problems in the United States."

3: Weaker euro

Investors around the world had been flirting with the euro as an alternative global currency to the dollar, but not any more. The euro's value dropped 22 cents since December, to under $1.30 this week.

That means Dutch chocolates, French wines and Swatches will cost less here, but American exports such as cars and airplane engines will cost more in Europe. Alcoa Inc., the largest aluminum producer in the United States, figures euro fluctuations impact its bottom line by about $40 million.

4: Dollar value

As investors abandon the euro, many will put money reflexively into dollars because that seems safer. That should keep interest rates lower in the United States, but some believe the dollar provides a false sense of security.

"It's like going from a sinking raft to a sinking ship," said John Browne, a West Palm Beach financial analyst and former member of Britain's Parliament. "It feels safer, but you want to get on a ship that's not sinking."

5: Going for gold

If the dollar is a big sinking ship, Browne said gold becomes like dry land. Gold never lost all its value, and as more people worry about currency failures, the price should go up. The value of gold hit $1,175 this week, up from less than $900 a year ago.

6: Economic union

United or not, Greece and its neighbors have a shared economy, said Abdylmenaf Bexheti, an economist at South East European University in Tetovo, Macedonia. Neighboring countries such as Macedonia, Albania and Kosovo can expect fewer Greek investments, and they can count on sending fewer seasonal workers to Greece's tourist destinations.

Greece's debt problems could make it tougher, too, for countries to join the European Union -- if they want to. Turkey shares a border with Greece and would benefit from entering the European Union, said Tekin Ozturk, owner of a textile company in Istanbul, Turkey.

"Greece will recover from this crisis one way or another, and the European Union will help Greece in this process," Ozturk said. "I am not quite sure about whether this crisis will affect our candidacy or not; however, I think that we should definitely be a member of the EU because I want the country to have a better democracy and a properly functioning system of law in addition to a sound economy."

7: Pay as you go

Austerity rules for Greece to pay as it goes apply to the United States and governments around the world, said Craig Thomas, senior economist at PNC Financial Services Group in Pittsburgh. People looking for an example of a place that emphasized entitlement programs over economic realities can easily point to Greece.

"Could there be any greater illustration of the risk of promising payments to people indefinitely?" Thomas said.

8: Moving money

Americans who parked money in Europe to offset losses at home need to find other ways to diversify, analysts said.

In all, about 6 percent of U.S. mutual funds investments -- or $180 billion -- was invested in Europe at the end of 2008, said David Wray, president of Profit Sharing/401(k) Council of America in Chicago.

Investors need to stay diversified, but BRIC countries -- as in Brazil, Russia, India and China -- could be more desirable, said John Frankola, president of registered investment adviser Vista Investment Management in Pittsburgh.

"I'm not crazy about the euro over the next three to five years," Frankola said.

9: Get romantic

With a weak euro, that romantic weekend in Paris comes at a discount. The cost of a 250 euro hotel room in Paris dropped nearly $55 since early December.

In an odd twist, the Greece bailout could indirectly boost traffic on Delta Air Lines' year-old route between Pittsburgh International Airport and Paris.

"Europe is still an expensive place and (American) consumers are still being cautious with their pocketbooks, but the currency definitely works in favor of more U.S.-originating traffic going across the Atlantic than last summer, as Europe becomes cheaper," said Bill Swelbar, research engineer with Massachusetts Institute of Technology's International Center for Air Transportation.

That's what Pittsburgh officials hope will happen.

"I feel bad for Greece, but I think this will definitely encourage more interest for discretionary travel to Europe," said Pittsburgh International Airport spokeswoman JoAnn Jenny.

Staff writers Rick Stouffer and Tom Fontaine and free-lance writers Ali Abaday from Turkey and Aleksandar Samardziev from Macedonia contributed to this report.

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