After the American Century
Imagine that Europe is a large ocean liner called the Titanic, and that it is sailing straight toward a massive iceberg that has appeared in the Mediterranean off the coast of Greece. The original idea for the ship was to create watertight compartments (national economies) below deck, so that if one or more of them filled with water (debt), the others would not also fill up. But this original plan was not fully carried out in the actual construction. The ship turns out not to be unsinkable because its compartments are not sufficiently strong, watertight, or numerous.
If I could go back in time and rebuild the Titanic, I would carry out the original design more completely. Greek debt is the iceberg smashing into the Euro, and I would rather each national economy had largely to stand on its own. Unfortunately, the European "reform" that seems to be favored by most leaders today is to remove most of the interior barriers and thicken the outside hull of the ship as a whole. The idea is that superior leadership and regulation from the center will avoid most of the fiscal icebergs of the future, and that when they do come the improved hull with be strong enough. I would rather not make well-functioning economies hostage to the Italians, the Greeks, the Spanish, and the Portuguese, or for that matter to any country that in the future might get itself into financial trouble.
What can Europe learn from this fiasco? I suggest that it ought to learn to keep the national economies more separate, rather than the widespread idea that what Europe needs is more integration. Better, surely, (1) to prevent banks from loaning more than 4% of their total worth to a single country, and (2) to limit how much money any nation can borrow abroad, making it finance a minimum 75% of its own national debt. If its own citizens will not buy most of the debt, why should anyone else?
More than two years ago I argued that Greece should not be bailed out. I wrote then, "Greece cannot pay its bills, even in the short run. With a national debt that is more than 110% of its gross national product, and a deficit of more than 10% for this year, Greece's debt will only get worse unless and until it enacts real reforms. So far it has failed to do enough, and the deficit will only get worse."
Most of what I wrote then is sadly still accurate now, except that the rest of Europe and the IMF have been pumping money into Greece while insisting on draconian reforms. But it has not worked. The choices then as now are either Greece leaves the common currency and goes back to its traditional overspending (with periodic drachma devaluation) or it really puts its house in order. Sadly, the second task is beyond its political capacity, as its recent, failed election process demonstrates.
As the crisis has been prolonged, money has been fleeing the country for safe havens before the collapse which seems to draw slowly but inexorably closer. It is difficult to know precisely how much money has been transferred or carried personally away from Greece, but it is more than €1 billion. This money could have helped keep the economy going. It is like taking blood from a dying man. Adding further to the misery, tourists are wary of booking trips to Greece, because it may descend into financial and political chaos. Why go there when other places are far more stable?
The only bright spot here is that the rest of Europe has had 27 months to prepare itself, by putting some firewalls in place. Whether these are good enough is not clear.
Had the Greeks been hit with a natural disaster like an earthquake, they would deserve sympathy and charity. But for years the Greek insisted on spending more than they could afford. They gave massive pay increases and early retirement to state employees that were not funded by taxation. Tax evasion was massive. There is no reason for the other European states to give or to loan them any more money. Giving them another handout will only delay for a short time the day of reckoning.