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The Dying “Save” the Dead: The Fallacy of the Eurozone Bailout of Greece

May 3rd, 2010

First it was the supposed citadel of free market capitalism, the United States, insisting that its beleaguered taxpayers must bailout the private sector Wall Street firms and banks, despite the nation’s public finances being  deeply in the red. Now, in macabre replication, all the nations that comprise the European monetary union and employ the euro as their common currency must bailout Greece, now threatened with national insolvency . The concept of moral hazard is therefore confined to the trash heap of history, as it was already disposed of in the U.S.

When the European monetary union was instituted, member states had to guarantee that their annual fiscal deficits would not exceed 3% of GDP. There is also a no-bailout clause in the Eurozone agreement, the implication being that nations utilizing the euro would establish the gold standard for fiscal prudence. Well, we have all witnessed what happened to that supposed gold standard. Successive Greek governments lied about the country’s fiscal problems, and with the help of outside Wall Street “consulting,” constructed stratagems to make it appear that the Eurozone deficit stipulations were being adhered to, when in fact Athens was drowning in a sea of fiscal debt. Even today, it is not known for sure how bad the annual Greek government deficit is, but most recent estimates put it at 14% of GDP, a figure so far in excess of the 3% Eurozone stipulation that it  boggles the mind that European taxpayers are being told by their politicians and the IMF that they should trust the politicos in Athens when they proclaim that their new austerity measures will magically shrink the Greek deficit to the required 3% in only a few years-though the estimate of when that  event will occur keeps being pushed back. In addition, most financial observers concur that the savage austerity plans hatched in Athens and Brussels with the IMF and Eurozone, will condemn the Greek economy to a prolonged and severe recession, making a mockery of claims that future economic growth will eventually improve the Greek fiscal imbalance.

In reality, Greece is insolvent, a point that Professor Nouriel Roubini has recently elaborated on, with a warning that a bailout that does not recognize that the nation is bankrupt will waste an enormous amount of public money. Even more surreal, the very nations being asked to bailout Greece are themselves in deficit, in some cases having a national debt and yearly deficit to GDP ratio as bad as that which brought down Greece’s public finances. Several of the countries that will be contributing public money to prop up Greece are on everyone’s hit list of the next Eurozone nations to be the target of the  unfolding sovereign debt crisis and bond vigilantes. These include Portugal, Spain, Ireland and Italy. We may soon witness the absurdity of nations that are experiencing their own debt crisis but must borrow additional money to bailout Greece, only to soon be in the same predicament as Athens, joining Greece in begging the IMF and their fellow Europeans to grant them a bailout.

Throughout the unfolding Greek debt crisis, politicians in Europe have sought  to pretend that the problem was only one of jittery markets, and things would return to normal. Before pleading for a financial lifeline of $146 billion from the IMF and Eurozone, Greek Prime Minister Papandreou gave numerous assurances that his country would not need a bailout. Now we are being told that countries that are themselves suffering various levels of debt problems should add the massive costs of a Greek bailout to their sovereign credit cards, and somehow this will all work out.

I just don’t see the logic of asking a terminally ill patient to provide a blood transfusion to a corpse.

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