Instead of extending Greeces credit line for another four months, European officials should have cut Greece off from the financial lifeline its been abusing.
It would have sent the right message to other spendthrift governments, such as Italy, Portugal and Spain, and would have forced Greece to reform its economy and get its finances in order. Now all the EU gets is another promise.
In hindsight, Greece never should have been admitted to the 28-member European Union (EU) or to its 19-member common currency area, the Eurozone.
Joining the Eurozone became possible in 2001 only after some creative accounting in Athens, overseen by Americas Goldman Sachs, the giant global investment banking firm.
EU officials in Brussels did their part as well, ignoring the fact that Greece didnt meet the convergence criteria for membership, including such basics as maintaining sound public finances and limiting government borrowing to avoid excessive budget deficits and unsustainable national debts.
As a result of profligate public spending, rampant government corruption and the unwillingness of Greeks to pay taxes sufficient to finance the government, Greeces economy hit a brick wall in 2011.
That man-made disaster was met by a loan of 240 billion Eurosabout $273 billionfrom the European Central Bank (ECB) in return for Greeces promise to restructure its public debt and come closer to meeting the convergence criteria.
Now this loan is due and Greece is in no better financial shape than in 2011. Faced with insolvency, Greeces newly elected left-wing Prime Minister Alexis Tsipras has reached an agreement with the ECB to extend the loan for another four months. But theres a price: Greece will have to make good on its promise to reduce government spending and reform its economy.
The austerity measures that won Greece the 2011 ECB loana combination of budget cuts and tax increases - already have triggered widespread public demonstrations against what Greeks perceive as ECB bullying.
With the prospect of further belt-tightening looming, Greeks have taken to the streets again. What theyre telling the rest of Europe, in effect, is, We like our generous public sector, and youre not going to force us to pay for it!
Until now, its mostly been German taxpayers, not Greeks, who have shouldered the burden, a consequence of Europes monetary union. Extending the loan doesnt change things.
The best way to change things would have been by expelling Greece from the Eurozone.
The short-run economic consequences for ordinary Greeks admittedly would be severeprobably harsher than any new conditions the ECB might impose for another bailout request in four months time.
Unemployment rates, already high, would soar. Businesses would fail. Assuming the country would return to the drachma, its long-time national currency, Greece might experience a period of inflation, as foreign exchange markets downgrade the currency and the Greek central bank attempts to counter this by expanding the money supplya sure formula for inflation.
Still, just as the hangmans noose focuses the condemned prisoners mind, Greeces expulsion from the Eurozone would have sent a strong signal that the EUs convergence criteria actually mean what they say.
Mario Draghi, president of the ECB, committed that institution back in July 2012 to do whatever it takes to preserve the euro. That sentiment still is widely held and probably explains the rationale for the bailout extension.
The key questions now are whether Greeks want it enough to pay the piper and whether Greeces socialist prime minister has the courage to forgo his campaign promises and become a free-market reformer.
|William F. Shughart II is Research Director and Senior Fellow at the Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.|
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