If politicians don't get serious about fiscal profligacy, markets will.
The sovereign debt crisis now threatening Europe, as well as major American states and cities, discloses the sheer incompetence of a political class that has over-promised, under-delivered and squandered vast amounts of their citizens' wealth.
Greece, Ireland, Spain, Portugal, California, Illinois, Los Angeles and Chicago are simply the poster children for what happens when elected officials engage in reckless and irresponsible management of their economies, their banking system or their respective government's public finances.
Greece's debt stands at 144% of its gross domestic product, the highest in Europe. Ireland's deficit is 98% of GDP, due in large measure to the liabilities it assumed when it bailed out the Irish banking system. The just-announced European loan of 50 billion euros to Ireland is equal to nearly 50% of its GDP. Within the next year, Italy will have to borrow 20% of its GDP just to refinance its maturing debt.
California's budget deficit has soared to $25 billion, or more than 25% of total spending. And, according to a recent study, the City of Chicago's unfunded pension liabilities total $45 billion, or more than $40,000 per household.
Politicians may not be solely responsible for this fiscal mess. But they are responsible for using borrowed money to pay for current expenses until they had borrowed more than they now seem able to pay back. Furthermore, they agreed to generous pension plans without properly funding those future obligations. As a result, massive tax increases--or a renegotiation of those commitments--now seem unavoidable. Neither alternative is going to be very pleasant economically or politically.
Prior to the euro, the political class in Europe could cover up its incompetence through a devaluation of the country currency in question. The ensuing inflation reduced the real value of the debt, providing elected officials and their economic advisors a face-saving way to force lenders to take a "haircut" on the value of their government bonds.
The Economic Incompetence Of The Political Class (http://www.forbes.com/2010/12/06/economy-sovereign-debt-euro-opinions-contributors-charles-kadlec.html)