Greek Lessons for Puerto Rico
It is said that those who do not learn from history are doomed to repeat it. Sadly, this seems to be the case with respect to the Puerto Rican government and its Oversight Board in their handling of the Puerto Rican economic crisis. By not drawing the right lessons from Greece’s recent failed attempt at fiscal austerity within a monetary union, the Puerto Rican government is all too likely to exacerbate rather than to cure the island’s current economic crisis.
Greek Parallels
In essence, Puerto Rico’s macro-economic challenge today is very similar to that of Greece in 2010. As was the case in Greece, Puerto Rico’s public finances have become seriously compromised in large measure due to years of economic mismanagement. This has led to a large public deficit, an excessive public debt to GNP ratio, and a very large amount of unfunded pension liabilities. Similarly, as was the case in Greece, Puerto Rico is now having to address these public finance imbalances within a currency straitjacket. Whereas Greece is part of the Euro bloc, Puerto Rico is tied to the US dollar which means that it does not have a currency of its own.
Large budget deficit reductions are very difficult to make in a monetary union. This is because the government lacks the normal monetary policy instruments to offset the contractionary impacts of tax hikes and public spending cuts on the economy. Not having its own central bank, it cannot lower interest rates to cushion the blow of budget belt-tightening. Similarly not having a currency of its own it cannot resort to currency depreciation to boost its exports and reduce its imports.
There are reasons to think that Puerto Rico’s challenge of rebalancing its economy today without monetary policy instruments is even more daunting than was that which Greece faced in 2010. Whereas Greece started its adjustment process with its macro-economy in reasonably good health, Puerto Rico is starting its adjustment process with its economy mired in a ten-year slump. Over the past decade, the Puerto Rican economy has shrunk by 10 percent while more than 10 percent of its population has migrated to the mainland. At the same time its unemployment rate remains over 12 percent and barely 40 percent of its population participates in the labor market. The island shows little sign of exiting this economic slump anytime soon.
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Πηγή: American Enterprise Institute
