Time to sever Greece from its EU lifeline
Instead of extending Greece's credit line for another four months, European officials should have cut Greece off from the financial lifeline it's 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 get its finances in order. Now all the EU gets is another promise.
In hindsight, Greece never should have been admitted to the European Union (EU) or to its common currency area, the eurozone. Joining the eurozone became possible in 2001 only after some creative accounting in Athens, overseen by America's Goldman Sachs, the giant global investment banking firm.
EU officials in Brussels did their part as well, ignoring the fact that Greece didn't 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, government corruption and the unwillingness of Greeks to pay taxes sufficient to finance the government, Greece's economy hit a brick wall in 2011. That disaster was met by a loan of 240 billion euros — about $273 billion — from the European Central Bank (ECB) in return for Greece's 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, Greece's newly elected left-wing Prime Minister Alexis Tsipras has reached an agreement with the ECB to extend the loan for another four months. But 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 loan — budget cuts and tax increases — already have triggered widespread demonstrations against what Greeks perceive as ECB bullying. With the prospect of further belt-tightening, Greeks have taken to the streets again. What they're telling the rest of Europe, in effect, is, “We like our generous public sector, and you're not going to force us to pay for it!”
Until now, it's mostly been German taxpayers who have shouldered the burden, a consequence of Europe's monetary union. Extending the loan doesn't 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 severe. Unemployment rates would soar. Businesses would fail. Assuming the country would return to the drachma, 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 supply.
Still, just as the hangman's noose focuses the condemned prisoner's mind, Greece's expulsion from the eurozone would have sent a strong signal that the EU's 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 probably explains the rationale for the bailout extension.
The key questions now are whether Greeks want it enough to pay the piper and whether Greece's socialist prime minister has the courage to forgo his campaign promises and become a free-market reformer.
William F. Shughart II is the research director of the Independent Institute and the J. Fish Smith Professor in Public Choice at Utah State University's Huntsman School of Business.