Last Monday night, before the US markets opened after President’s Day, bailout terms for Greece were announced.
The detail is secondary to assessing whether or not it will work, or whether only a little time has been bought. Theoretically the deal can work, but it is extremely unlikely that it will. Almost everyone knows or suspects this, but the survival of the European political system is at stake, and this systemic priority is more important than hard economic reality.
The sceptics are right for the wrong reasons. Few analysts correctly define the problem and how it might best be resolved, because they only understand intervention. Some insist that Greece should leave the euro and allow a new drachma to float lower, so that the cost of Greek labour becomes competitive. The fallacies in this argument are numerous and obvious; suffice it to say that a new drachma backed by nothing more than misplaced hope would immediately collapse, ensuring complete chaos, while euro-denominated debts would remain unpaid.
Others say that GDP is falling at whatever-rate-per-cent and that cutting government spending will make it fall even faster: by postponing economic growth, Greece’s ability to pay down the debt will be severely limited. This confused argument ignores the economic burden of excessive government and consequently the benefits of cutting it to the bone.
The idea that government has resources not raised from its citizens is a Santa Claus fable, elevated to the dignity of an economic doctrine and endorsed by all those expecting a personal benefit. A government can only spend what it takes from its citizens, and the more a government spends the greater the burden it imposes upon them. Therefore, if the creditor-imposed unwinding of government spending results in the net transfer of resources (net, that is, of debt repayments) back to the private sector it will have a chance of success. However, all those citizens banking on hand-outs from the government will need persuading that it is for the best.
This is a difficult task, and given decades of interventionism no one is equipped to argue a cohesive case for reversing government expansion. It has been successfully done before, most notably by Britain after the Napoleonic Wars. The difference then was that public opinion was not entrenched in a benefits mentality.
Unwinding economic distortions, the result of the public sector’s intrusion into and imposition upon the productive economy, will be a very difficult political task. At the end of the day a prosperous private sector is Greece’s only hope, and it requires sound money to support capital investment, radical cuts in the public sector, and the lowest taxes possible consistent with sound government finance. The instincts of the interventionists are to do the exact opposite.
The chances of the powers-that-be getting it right are frankly, very slim. It can only be done by giving up all pretentions that intervention has economic benefits, and convincingly arguing the case in front of a sceptical public which is now minded to rebel against all authority.
Unfortunately, the Greek crisis is far from resolved, and will most probably worsen.