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.
