Should Greece Exit the Euro?

After the American Century

Some time ago in this space I suggested that giving money to the Greeks would not solve their problems, and that it was better to let them go bankrupt if they could not reform. Now leading German thinkers have reached the same conclusion, as reported today in the New York Times.  It took them a while, and the Germans pumped billions of dollars into Greece while thinking about it.  Now some are suggesting that perhaps Greece should exit the Euro, and in effect go through bankruptcy, and then come back in when its house is in order. There is no mechanism for throwing a country out of the EU, so this would have to be a "voluntary" departure.

It would have made far more sense to refuse a bail out in the early spring. To refuse now has a different meaning than it would have then. In August a refusal says not only that the Greeks must pay their own way, but that their problems are too big for the rest of the EU. Stopping all support for Greece now looks rather like a team of fire fighters leaving a blaze that is out of control because they cannot put it out. If the fire brigade is inadequate to save Greece, what good will it be when a larger economy such as Spain or Italy gets into trouble? The EU begins to look weak, and its currency unreliable. 

In short, once the EU has gone this far to save Greece, it rather must find a way to succeed. Recently, I suggested in jest that perhaps Greece could lease some of its islands to other countries for 99 years. This idea begins to look almost serious.

Greek Bail-Out Not a Good Idea

After the American Century

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.

Had the Greeks been hit with a natural disaster like Haiti, they would deserve sympathy and charity. But the Greeks  insist on spending more than they can afford. They have given massive pay increases and early retirement to state employees that are not funded by taxation. They reportedly have a massively inefficient bureaucracy. There is no  reason for the other European states to give or to loan them money unless they show that they can live within their means. Giving them a handout will solve nothing, and will only delay for a short time the day of reckoning.

Indeed, the EU has made a major blunder by even letting this become an issue. Its own laws clearly state that nations who overspend will not be bailed out.

Consider, by comparison, the plight of California. It is also a part of a federation of states that have a common currency. But no one in the US is suggesting that Ohio, Nebraska and Maine should help fund California. Instead, since California voters refuse to raise taxes, they are closing libraries, firing workers, and forcing those who remain to stay at home several days a month because there is not enough money to pay them. Admittendly, this is ridiculous, since California is a rich state and could afford to fund its education system and its services, but this is the choice the state's citizens have made. The rest of the United States will not bail out California, and as a result the state is a less desirable place to live than it was a few years ago. Eventually, the voters will realize that they have made a mistake, and in the meantime loaning them money will actually prevent them from confronting that mistake.

So why are Europeans wringing their hands over Greece? You don't get an alcoholic to reform by buying another round of drinks.