The Global Economy Will Suffer Greece's Bailout

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The IMF and EU announced on Sunday a $146 billion, three-year bailout package for profligate EU member country, Greece. Though the numbers involved are large in nominal terms, Greece's inability to service debt that looks microscopic relative to the debt levels Americans have grown used to speaks to how economically insignificant Greece truly is.

And there lies the problem with its bailout.

If a country like Greece can be deemed "too big to fail", what countries aren't? In that certain sense, the global economy will suffer the unwillingness of government bureaucrats to allow Greece to work out its presently insurmountable debts on its own.

This will show up most notably in the less frenzied efforts of other countries such as Spain, Portugal and Italy to sort out their own debt problems. Knowing full well that Greece being saved means they will be too, urgency among other countries teetering on the edge of default will be reduced.

For those desirous of renewed job creation globally, the above will be a major problem. Indeed, while it should be self-evident by now, it bears mentioning once again that there are no jobs without investment, and bailouts of overextended governments with limited capital ensures that less in the way of investment will reach existing and future companies eager to actually do something productive.

With investors made whole by governments afraid to see the unsustainable nature of their spending programs exposed, they'll in a very real sense be given a classic "mulligan" whereby they won't pay dearly for their mistakes. This knowledge in hand, investors will continue to take advantage of returns offered by governments, as opposed to directing their funds away from government waste. The losers in this scenario will be the companies starved for limited capital, and the individuals starved for jobs and wages reduced by the "safety" that is government debt.

Some will naturally reply that the future of the euro hung in the balance if Greece hadn't been saved. If left on its own, Greece would surely have left the euro, with other economically weak nations soon to follow. Supposedly a Greek default (despite the fact that it's been giving investors haircuts for a century) would drive the disappearance of the euro altogether.

Scary consequences for sure, but arguably not very realistic. To suggest that the EU nations would return to individual forms of money is to suggest that all of them would embrace the economic inefficiency wrought by myriad, undefined currencies.

This isn't very likely, and to see why, we need only consider what the U.S. economy would look like absent a dollar that serves as legal tender in all fifty states. As poorly managed as it is, the dollar's broad acceptance has made economy-enhancing trade across state lines far more prevalent thanks to the Union possessing but one unit of account.

For defenders of the Greek bailout to argue that Europe's currency was threatened by yet another Greek default (and its departure from the Euro bloc) is for them to say that the more stable countries in the currency union would let one of its weakest members wreck what is working. More realistically, Greece's continued membership as a Euro country is the greater threat to the currency for its unwillingness to abide by the debt limits set to reduce defaults to begin with.

It may not look this way now, but the Greek bailout will weaken the long-term euro outlook for making it apparent that membership rules don't count. If Greece can ignore them, what does this say to the economically significant countries?

Beyond that, not asked often enough is what Greece might have done absent a lifeline. Sensing that its economy would suffer for the lack of a credible, broadly used currency, it's fair to presume that the country's leaders would have sought true austerity in order to remain part of a currency bloc that conferred developed status on the country, and by virtue of that, on its producers. To put it simply, the "seen" is the bailout that has allegedly saved the euro, but the "unseen" is how much more credible the euro would be had Greece been forced to work out its problem on its own, with continued EU membership in the balance.

Of course all of this commentary ignores the greater truth that the bailout of Greece is yet another backdoor bailout of investors and financial institutions. Governments have no resources to begin with, so had Greece defaulted, life would have gone on in the ancient nation, albeit life with a smaller government. Importantly, the government-sapping stringent lending terms that would have been forced on it would have been additive to economic growth over time.

Instead, investors and banks will be made whole again, Greece's bureaucrats and retirees will continue to live off of others, and no one will have learned a lesson. What's that they say about freedom to fail being as important as freedom to succeed?

It's perhaps tautological to say that governments are presently being run worse than ever, while private companies are being managed better than ever thanks to the rough justice of free capital flows that ensure poor managers are starved of it at the expense of good ones. Thanks to the unnecessary bailout of Greece, profligate governments renowned for waste will continue to destroy limited capital, while well run companies will continue to navigate a difficult financial environment.

In short, the global economy will suffer the ongoing subsidy of that which doesn't work, all of this at the expense of producers around the world. This should be remembered the next time anyone wonders why job opportunities don't abound. Governments are stealing them.

 

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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