At the end of the day-the combination of existing debt and public expectation for the minimum social safety net (health care spending, retirement benefits, baby bonuses, etc) may compel Germany and other richer countries to choose between Greece and other poorer countries quitting the euro-returning to their own currencies-or a combination of high inflation and greater fiscal union in the EU. Regarding the latter choice, either the North subsidies the South through ECB printing euro and inflation, or the EU transfers tax revenues from richer to poorer countries.
The Germans rightly fear hyper-inflation, and a EU take over the social safety net by granting it taxing authority over the entire EU to finance it is unlikely. Instead, countries like Greece may be forced to leave the euro zone or the euro will disappear all together. This could take several years to play out.
Lessons for the United States
The U.S. federal government and many states face similar difficulties but for the fact that the United States prints dollars-the global currency-but that could change.
The budget published by the Administration contains optimistic assumptions about economic growth from 2011 through 2015-in the range of 4 percent-when most private economists think something less is likely.
It contains the politically less difficult fiscal levers-repeal of the Bush tax cuts for families earning over $250,000, and the estimated revenues and costs of the new health care law were in line with CBO estimates for what ultimately emerged, including the interest and dividend tax.
More realistic assumptions about growth and the cost of health care put U.S. projected deficits on the path to unsustainability-more than $1 trillion a year for many years. Hence a value added tax is now on the table.
In the current environment of indiscipline, a VAT would be a disaster.
The polemic is appealing. Other industrialized countries have one, now that U.S. social benefits are more like those with the passage of national health care, the United States should have one too?
Not so fast.
Europeans pay a VAT and have income and corporate taxes too but they pay little for health care and higher education-the government uses those taxes to pick up the tab.
With a VAT, U.S. individual and business taxpayers would have tax burdens comparable to Europeans but would still face hefty bills for private health insurance and college tuition that Europeans do not bear.
The reason is simple. Americans pay 50 percent higher prices for health care services than the Germans and other most other Europeans, and U.S. universities are hardly hubs of modern efficiency.
The recent health care law contains firm commitments about scope of coverage and benefits guaranteed each citizen, but it is soft about bringing down higher U.S. drug, medical professional fees, administrative costs, and malpractice costs into line with Europe.
U.S. governments, federal and state, pay for about half of U.S. health care expenses, and a VAT would take away the pressure to chisel down to size the price of drugs, physicians fees, etc to make health care affordable.
U.S. higher education is another big hole in household and state finances. We are paying too much for what we get, except perhaps from our most modest institutions-community colleges.
A VAT, without offsetting cuts in personal and corporate taxes, will only make Americans poorer and with fewer incentives to work and innovate than the Europeans now have, cause businesses to offshore even more jobs and tax economic growth to anemic levels.
Without a VAT and absent real and substantial cost cutting for health care and provision of other public services, budget deficits will drive up U.S. borrowing costs to unmanageable levels.
With a VAT and no real cost cutting, the absence of growth will strangle American prosperity.
Greece is a warning to governments that promise too much and pay too much for what they promise.
The United States is hardly free of such folly.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.