The Greek Debt Crisis for Economic Morans
Imagine if the U.S. government cut spending by nearly $1.6 trillion in one year. I daresay we'd have riots in the streets too. What policymakers, bureaucrats, and ordinary people in Europe are beginning to realize is that there are limits to the welfare state. After being told for 60 years that government was a spigot from which flowed unending goodies, reluctantly, and with great resistance, Europeans are beginning to understand the concept of limits. There comes a tipping point where taxing producers and giving to non-producers is no longer a viable governing strategy. And because Greece hid their real deficits for years (with the help of Goldman Sachs and other big banks), when the tipping point was reached, it came as a total shock not only to the Greek people, but to creditors around the world.
This "contagion" of doubt is a disease that afflicts much of Europe at this point, as explained by Neil Irwin at the Washington Post:
Contagion is a function of vicious cycles in which confidence in a country's ability to repay its debts falls. If investors lose piles of money on the debt of one country, they assume that owning the debts of other countries with similar finances might cause them to lose even more. So they sell their investment in the second country, which in turn must pay higher and higher interest rates to get any loans, which adds to its debt and creates a fiscal death spiral that can well move on to the next country.
The Greek bailout package is supposed to tide the government over while they deal with the fiscal insanity left over from previous governments. But some very smart people are saying even the $150 billion isn't near enough, that it is only postponing judgment day.
This becomes of interest to American taxpayers because about 40% of all that IMF money comes out of our pockets. And with the prospect that other weak sisters like Spain, Portugal, and Ireland may follow Greece in taking a long walk off a short pier, we Americans would be faced with the prospect of bailing out the IMF:
Greece's bailout alone is likely to cost 120 billion euros ($159 billion) over three years, German Green Party lawmaker Juergen Trittin told Bloomberg News Wednesday, after being briefed by IMF Managing Director Dominique Stauss-Kahn. The IMF can handle bailing out Greece, as well as a potential stabilization plan for Portugal (budget deficit 9.4% of GDP), if the debt contagion moves West. The actual bailout tab could, of course, turn out to be a lot more.
The IMF wouldn't have enough funds on hand, say, to stabilize Spain (budget deficit 11.2% of GDP), which has an economy four times larger than that of Greece, if Spain determined that it required help at the same time as Ireland needed funds.
With the entire euro zone tapped out from bailing out Greece, the problem will fall right into Uncle Sam's lap. At that point, it will become necessary to decide whether to allow Europe to collapse into a muddled heap or assist the IMF in saving what's left. The fact that such a catastrophe would almost certainly impact our own economy negatively might give the impetus to politicians for bailing out the IMF.
Still with me? The numbers being tossed around are dizzying - especially for us Morans. All we need to know at this point is that Greece is getting gobs of money, including 22 billion euros from Germany alone, and that there doesn't seem to be much spine in the Greek government to make the admittedly tough decisions on cutting spending that would start them on the road back.
In other words, these guys are so addicted to spending and so terrified of offending voters that they might prefer paying off 25 cents on the dollar to their creditors and being kicked out of the European Monetary Union instead of biting the bullet and doing what's right for the long-term health of their economy. In their efforts to quiet social unrest, they may open an even bigger can of worms when the dominoes start to fall and the Greek economy collapses, triggering a "contagion" that would affect several other states.
When experts a helluva lot smarter than me and you start talking in such apocalyptic terms -- and in researching this piece, I found that so many of them are -- the natural tendency to accept "authoritative" analyses becomes almost overwhelming. In truth, I would like to believe those other experts who are confidently predicting that the Greek bailout package will do the trick, and that other nations like Spain, Portugal, Italy, Ireland, and Great Britain can muddle through without causing a massive problem.
But many of these optimists had a hand in creating this debacle in the first place. EU governments, central bankers, finance ministers -- they all ignored the problems until the fire began to consume them. And now we're supposed to accept their confident forecasts of recovery?
What do they take us for? A bunch of Morans?