courtesy of guardian.co.uk
Here is UNC-CH College Libertarians President Alexander Lopez’s take on the current Eurozone financial crisis, originally published in the Carolina Review :
Not since World War II has Europe stood so closely to the precipice of calamity as they do now. Excessive amounts of sovereign debt in Portugal, Ireland, Italy, Greece and Spain (the PIIGS) threaten to send the entire Eurozone into an economic tailspin from which recovery is highly unlikely. Past attempts to remedy the debt crisis have only served to temporarily delay the inevitable while simultaneously digging the hole ever deeper. However, before one can understand the crisis, it is important to have an understanding why the Euro was doomed to fail from its inception.
The common currency for all Eurozone members (17 of 27 European Union countries), the Euro, was created in 1992 with the inception of the Maastricht treaty and fully adopted in 2002. With the Euro came the European Central Bank (ECB) and a centralized monetary policy. Additionally, fiscal (taxing and spending) limits were also placed on governments in order to prevent them from taking on too much debt which, under a common currency, can significantly harm other member countries. Now here’s the kicker – the words written to place fiscal restraints on individual countries were just that, words. No serious enforcement mechanisms were put in place to punish countries that disobeyed. Any person that has spent time with a small child knows that a rule with no enforcement is not really a rule at all.
As can be expected, certain countries lacked the political will to restrain spending (sound familiar?) and currently find themselves under a massive pile of debt. Cue the finger pointing and ignorance claiming of the oh-so innocent politicians in Brussels (the capital of the EU) and respective national capitals. In this case, however, ignorance is a tough sell. Economists from such ideological polar opposites as Paul Krugman and Milton Friedman both foresaw the problems that would arise from having a monetary union without one single, enforceable fiscal policy.
The PIIGS have taken on so much debt that they threaten to bring the entire Eurozone down if they default. The most immediate threat comes from Greece, which after converting to the Euro went on a debt-fueled binge of public spending. Sadly for them, the market has come to the realization that they will likely never be able to pay back their debt, which also means a credit rating downgrade and higher interest payments on debt moving forward. That being said, the phenomenon of enormous borrowing is not limited to Greece. Many other countries, such as the other PIGS, U.K., France, and the United States (yes, you read correctly) have all spent beyond their means and are sitting on piles of debt that are ever increasing in size and interest payments. The only difference between Greece and the other debt-ridden countries is that the “(stuff) has hit the fan” first for Greece, putting them in the spotlight. Know that soon enough others will fall directly in their footsteps.
As early as 2009, credit ratings agencies saw the problem with Greek debt and proceeded to downgrade their credit rating. Soon thereafter in April 2010, the call for Greek bailouts started to flow. Instead of attacking the core problem of bloated government spending, by May 2010 the EU and International Monetary Fund (IMF) put together a 110 Billion Euro (146.2 Billion Dollar) bailout package. The conditions of the bailout were that Greece would take large strides towards austerity and make “great sacrifices” as said by PM George Papandreou. These ‘loans’ were meant to assure the markets that Greek bonds had the full support and stability of the EU/IMF. They were essentially saying, “We promise we won’t let them default, so keep buying their debt.” Yes, because when you are in a hole, digging deeper is the obvious solution. Artificial injections of confidence rarely fool markets for any significant period of time, and this was no exception.
Predictably, Greek politicians made promises they could not deliver on—big surprise – and, once again, Greece is nearing default on its debt obligations. Cue bailout preachers. “We need it! We deserve it! Everyone will suffer!” The bailout is not only being lobbied for by Greeks along with other Eurozone countries, but additionally, many (pseudo)private banks are in the queue. The banks are in line because if Greece defaults on their debt, the bonds they purchased will never be repaid.
These largely French and German banks bought very large amounts of high risk sovereign Greek debt (bonds) and now find themselves heavily financially exposed with the possibility of a Greek default looming. They are now coming to the table begging for bailouts to save their own behinds (sound familiar?) If they had turned a profit, they surely would not have shared it with the taxpayer, right? Yet, since they made massive unsound investments, taxpayers are expected to foot the bill. Sounds a lot like “heads I win, tails you lose” to me. The point being is that bailouts encourage risky behavior and eventually beget more bailouts. Moral hazard, anyone?
The tone of this article may sound like I am ganging up on Greece, however, I am not. I refer back to my earlier caveat that they are only the tip of the iceberg, and as we all learned from the film Titanic, 90% of an iceberg’s mass lies below the surface. Paul Krugman recently wrote that Greece is,”… no more than a grim sideshow,” while Italy, and to a slightly smaller extent Spain, pose the true, largest threat. They are the third and fourth largest economies within the Eurozone, and if they were to default on their debt – which looks increasingly likely – the whole system could not avoid a collapse.
Well, the second bailout everyone clamored for came in the wee hours of October 27th, when Greece was given a new 130 Billion Euro (184.7 Billion Dollars) check form the EU/IMF. Additionally, private bond holders (banks) agreed to a 50% writedown, or popularly known as a “haircut”, in the value of the Greek bonds they own. This, in layman’s terms, is a default on half of its debt. A provision to increase the European bailout fund by four to five times, which would be near one Trillion, was also included.
Great! They stemmed the crisis, and Greece is not going to default. Correction – Greece will not default today. What about the future? What happens when Italy, Spain, Ireland, Portugal and France, which suffer from the same basic problems as Greece, come for their bailout? There simply will not be enough money to go around.
This leads to the obvious question – where should we go from here? Well, the EU was onto something with the semi-default of Greek debt, but they failed by not taking the sound logic to its conclusion – full default. As Harvard economist Jeffrey A. Miron poignantly wrote in the BBC, “The question for Greece is whether to continue its recent path – continued attempts at austerity, which do little to tame the deficit, followed by just enough bailout from the EU to avoid default – or whether to finally admit the obvious: it should default on its sovereign debt, abandon the euro, and go its own way.”
Mirons’ solution addresses Greece’s two main problems: crushing debt and an improperly valued currency. In what world does it make sense to have such vastly different economies as Germany and Greece under the same currency? The simple answer is never. Leaving the Euro would also mean that less risk will be born by other countries if Greece continues with their reckless spending ways. Are there negatives to this approach? Yes, Greece will be largely excluded from international credit markets for the immediate future, but this, however, seems like a reasonable alternative to writhing under the pain of austerity measures and slow economic growth for years to come. The bottom line is that if Greece is allowed to exit the Euro, it will return to a competitive currency, and the EU will have trimmed off some of the deadweight, making them both stronger.
Sadly, I do not believe this exit will happen soon. The EU is first and foremost a political union, above an economic union, and the Europhiles will be damned if they are going to sit idly by and let their creation break apart. No, they will support their vision of a unified Europe until the problem is so large no one can stop it.
Now we return to the question of “where should we go from here?” Continuing down the path of bailout to bailout has taken us this far with no end in sight. The only way to stop the problem at its root is to allow Greece and other countries the option to default, putting the costs not on European taxpayers but the financial institutions that took the risk and letting them abandon the ill-fitting Euro if they see fit.
