April 29, 2010

A Greek Crisis Should NOT be A Euro Crisis

After the American Century

When my neighbor down the street goes on a spending spree, no one thinks all the neighbors should chip in and pay for his extravagance. The neighbor has to learn to live within his means. The same applies to nations. Greece has for years been living far beyond its means. It has allowed people to go on pensions at an earlier age than they can in other nations. It has not collected taxes from some of its citizens. It has allowed its public sector to grow and grow. It has routinely had much larger deficits than are allowed in the European Union.

Now the bill is coming due, and suddenly the world's stock markets see this as a crisis of the Euro. It is not. There is no reason for Germans to work a year longer before retirement so that Greeks can retire early. There is no reason why British home owners should pay higher interest rates because the Greeks have not lived within their means. There is no logic to the idea that the Euro will be stronger if other countries pay Greece's bills. Rather, it is logical that the Euro will be stronger if its nations enforce fiscal responsibility and prudence.

It sounds harsh but it is only fair that, if the Greeks cannot pay their bills, they must find their own solution to the problem. Greece is not a poor nation. It has many wealthy people. It has not suffered an earthquake or some other unforeseeable natural disaster. Greeks saw the problem for years and failed to deal with it. Greeks have to take responsibility for their own fate, rather than expect the International Monetary Fund or the other EU counties to pay their bills. Loans to Greece are fine, but only if they are going to be paid back.

People seem to think it terrible to contemplate Greece defaulting on their national debt. Yes, it is terrible, but it is even more terrible if other countries pay their bills. The Germans are quite right to resist loaning the Greek government money before they demonstrate that they can bring their economy into balance. The banks should have been equally hard on Greece years ago. International investors have over-extended credit to profligate nations, and they want others to pick up the tab. Sorry, but that is not how things are supposed to work.

Ah, but we are told, the poor Greeks will suffer under the austerity of budget cuts. Indeed, they will. That is the logical consequence of fiscal irresponsibility.  The Greeks as a whole are not poor,  and if they really want to they can invest their considerable wealth in government bonds, and then, as voters, make sure they get their money back. The Greek pension funds could be heavily invested in the Greek national bonds.  Or the Greek's could hold a massive telethon and get their own citizens to buy ten year government bonds at 5%. That would inject some reality into the situation. If Greeks don't want to buy their own debt, then why should anyone else?

Beware of Greeks demanding gifts. Beware of investment banks wringing their hands and saying the Euro is at risk, when it is their  poor judgement that led them to keep loaning money to Greece. And stop this nonsense of thinking that if Greece goes bankrupt due to a lack of political integrity and national will, somehow that means that the Euro itself is weak or that Germany or France or Sweden suddenly are not good places to do business. It should be just the opposite situation. The reluctance to pay the Greek bills should signal that the EU nations as a whole are sensible, that they will not be stampeded by incautious bankers into paying someone else's bills.

If all this seems a rather harsh argument, consider that other common market, the United States. The 50 individual states each has its own budget, and some of them at times get into trouble. California has overspent and under taxed itself into a corner at the moment. But that is California's problem, and it does not mean that the dollar is suddenly a bad currency.

California's economy is larger than that of Greece. Time to get some perspective on this issue.