Greece vs California: Keeping perspective

Arnold about budget 2010: “The federal government is forcing us to spend money we don’t have.”

Much noise is being made about Greece’s precarious economic position, and of the possibility that it may be forced to leave the euro (European Monetary Union), although this was dismissed by the president of the European Central Bank yesterday as “absurd.” While we won’t dismiss the possibility as “absurd”, we need to keep some perspective here.

The Greek economy accounts for about 2% of the EU economy. Greece is seen running a budget deficit of some 13% of GDP in 2009, and its public debt is currently around 120% of GDP. The official Greek unemployment rate was 9.8% in October 2009.

Now zoom over to California: this state accounts for 13% of US GDP and is the world’s eighth largest economy. Californian governor Arnold Schwarzenegger declared a fiscal emergency last year – as the state budget shortfall is equal to 25% of revenues. California’s headline unemployment rate was at 12.3% in November. California’s debt rating was cut yesterday by Standard & Poor’s and the state’s borrowing costs have risen by 24% since September last year.

At the end of the day there are 40 states right behind California that will push the Federal Government of the US into bankruptcy. The EU’s problems aren’t half of those of the US. The bankruptcy of California alone could be the trigger for the hyperinflation of the dollar.

If the EU and the US were two airplanes flying side-by-side, the EU is losing a flap while the US is losing a wing. Which out of these two will you back in a race to the bottom?

UPDATE: Solid article from Mike “Mish” Shedlock on sovereign debt woes and the broken credit ratings model.