Bloomberg View

Why Europe’s Greek Dilemmas Aren’t Over
● The Case Against a Cherished Tax Break


The Greek government on June 29 pushed through Parliament, by a vote of 155 to 138, the first phase of an austerity package needed to avert a default on billions of euros in government debt. Success, though, only postpones an unsavory choice that the euro area’s leaders will face sooner or later: Let Greece go and put both the European experiment and the global economy at risk, or forge a deeper union in the face of opposition from their voters.

Even if Greece gets its bailout and its economy rebounds, the government will have to run a budget surplus, excluding debt service costs, of 5 percent of gross domestic product for about three decades to bring down debt to the 60 percent maximum allowed by euro area rules. Achieving such a fiscal feat for even five years is extremely rare for any government, let alone Greece’s.

The Greeks, of course, bear the main responsibility for their predicament. They effectively lied their way into the euro, presenting deficit figures that were wildly understated. The country consumed far more than it earned and borrowed to make up the difference. Tax evasion is a national sport.

Greece’s foibles, though, would not have led to a crisis without the help of Germany and France. Those countries played the leading role in setting capital rules that encouraged German and French banks to finance Greece’s profligacy, and then required too little equity to absorb the potential losses. Because of lax oversight of derivatives markets, regulators now have little idea where the losses will turn up if Greece reneges on its debts.

There are two ways the responsible parties can rectify their mistakes. One is to recognize that Greece should never have joined the euro. If it can’t or won’t swallow austerity measures, let it leave and default on its debts.

But the risks of allowing Greece to fail are similar to those the U.S. faced with the bankruptcy of Lehman Brothers Holdings in 2008. Uncertainty about losses would very likely undermine confidence in European banks and in the governments that would have to bail them out. If Greece’s failure were to lead to a credit freeze, that would threaten banks with insolvency and cause losses for institutions that hold those banks’ debts, including the money-market mutual funds entrusted with $2.7 trillion in U.S. savings.

The alternative path is only slightly less ugly and unfair. It would require the euro area, led by Germany and France, to assume much of Greece’s €345 billion ($495 billion) in debt indefinitely and be prepared to take on the debts of Portugal and Ireland as well. The Greeks, for their part, would have to suffer deep wage and benefit cuts to restore their country’s competitiveness.

To help make such adjustments bearable, euro area nations would have to provide money to support social safety nets, most likely through a unified finance ministry that many voters would consider a loss of sovereignty.

Risky as it may be, taking responsibility for Greece’s problems is the least bad option for Europe. This is no longer about saving Greece. This is about self-preservation.


Forty-nine percent of respondents in a Bloomberg National Poll said they were willing to give up the ability to deduct mortgage interest from their personal income taxes if it meant lower overall tax rates. Only 45 percent opposed the switch. That’s a sharp contrast with polling patterns of prior years, when the public showed 2-to-1 support for keeping the mortgage deduction. This change in sentiment creates a rare opportunity to fix a tax policy mistake that the American public and its political representatives have defended tirelessly.

The case against the deduction is strong. It is costing the U.S. Treasury $104.5 billion this year. It showers most of its benefits on wealthy people in high tax brackets who were going to buy homes anyway, while offering too little for strivers in the lowest tax brackets.

Worst of all, this tax break makes taking on unsustainable levels of personal debt too attractive. It can goad people into buying homes they can’t afford. It also encourages them to keep borrowing against the real estate they have, creating shaky home-equity loans. Instead of making homeownership more affordable, the mortgage deduction may create housing bubbles and, in some places, inflate home prices so new entrants are priced out of the market.

Last year the bipartisan National Commission on Fiscal Responsibility and Reform, led by Alan Simpson and Erskine Bowles, proposed modest curbs in mortgage-interest deductibility, to be phased in over seven years, as a way of narrowing the federal budget deficit. That time frame seems ample. The U.S. can start by reducing the maximum amount of eligible mortgage debt to half the current $1 million. After that, full deductibility can yield to ever-smaller partial deductions.

Public jitters about losing a cherished benefit can be put to rest by lowering overall tax rates to offset the impact of the fading mortgage deduction. By using a 5- to 10-year phase-in, the U.S. could gradually move toward a more equitable tax system without creating sudden upheaval in people’s finances.

Getting rid of the mortgage deduction is one of the most effective elements of any plan to lower overall tax rates or narrow the deficit. That process should begin in earnest. This is a rare opportunity to make the most of public willingness for change.


    To read Pankaj Mishra’s dispatch from Turkey and Jonathan Alter’s take on the politics of debt, go to:

    Before it's here, it's on the Bloomberg Terminal.