By HOLMAN W. JENKINS, JR. at The Wall Street Journal
Journalists have strained to apply their good guy-bad guy conventions to the Greek crisis. But are the bad guys the greedy, wastrel Greeks? Or are the bad guys the imperious, demanding Germans?
In fact, this narrative is a poor construction. What we’re seeing is less a story of good guy-bad guy than a terminal falling out among Europe’s club of welfare states over the inevitable problem that eventually other people’s money (in Margaret Thatcher’s phrase) runs out.
The Greek combination of welfarism-plus-cronyism, with a large helping of outright corruption, has long relied on other people’s money from abroad to make ends meet. But if the terms imposed by fellow Europeans for fresh loans-cum-aid have lately seemed intolerable to Greek voters, they still took the availability of fresh loans for granted. This week they are learning their right to their neighbors’ money is not automatic after all—and yet, for reasons we’ll get to, don’t be surprised if there’s an 11th-hour bailout.
Let us not kid ourselves, the way many Europeans are kidding themselves, that Greece is entirely unique. Portugal, Italy and Spain—“core” European welfare states—already have made the same transition to dependence on external “other people’s money” to uphold their welfare systems.
Their version of other people’s money is Mario Draghi’s implicit promise to tax all Europeans with future inflation (a promise that remains implicit at this point) to keep their welfare states afloat. If not for the European Central Bank’s promise, these governments likely would already be in the same position as Greece—unable to finance their deficits.
As long as Mario Draghi is on the job, there should have been no dramatic, visible “contagion” from the Greek crisis. And there hasn’t been, for the same reason there was none from the Cyprus crisis two years earlier. There is no “surprise” involved: The markets had already fully internalized that Greece and Cyprus were outside the circle of Mario’s magic guarantee, so there is no reason their default need be seen as heralding other defaults.
But the fundamental long-term problem still remains: How will France and Italy especially (the key too-big-to-fail economies) find their way back to reliance on internal taxation plus voluntary, market-based lending to keep their welfare states up and running? Is this even possible in a democratic political system with large, calcified interest groups? Then again, if European states are already maximizing their option to avoid reform, might not the feared triumph of populist parties in future elections actually be a good thing, producing a crisis that forces action?
The markets don’t know but they rely in the meantime on the European Central Bank to sustain investor confidence in French, Spanish and Italian debt. Yet at any moment that intuition could change, forcing the ECB to choose between Mr. Draghi’s promise and the ECB’s supposed legal bar to directly financing member states by printing money. Then, look out.
In the meantime, notice a couple of random things about the Greek mess. Europe’s quid pro quo for new loans has consisted mostly of fiscal contraction—higher taxes and spending cuts—rather than tax cutting, deregulation and privatization, though these steps would do more to restore growth to the Greek economy. That’s because such pro-market, “Anglo-Saxon” nostrums would be no less ideologically embarrassing to the German, French and Italian governments than they would be to Greece’s “radical” Syriza Party. Syriza, to fellow Europeans, may be unclubbable for a host of reasons, but Syriza’s hostility to capitalism and markets isn’t one of them.
Let us notice something else. Devaluation is not a solution for every country in trouble. But Greece is in a unique situation now. Its economy is severely depressed with lots of unemployed workers and idle resources. Its banking system is running out of euros and on the verge of collapse. Meanwhile, Greece has the opportunity to repudiate a lot of inconvenient foreign debt.
Under these circumstances, bringing back the drachma would mean an instant return to liquidity. It would mean an instant boost to consumer demand. In the conditions that Greece is rapidly falling into, any currency is going to seem a godsend compared to no currency. Even more so when Greek savers start bringing back the 100 billion now-domestically coveted euros they’ve drained from the Greek banking system with the ECB’s generous help.
The example of a successful exit from the eurozone would potentially be catastrophic to Germany and the other creditor countries—imagine if Italy or France got the idea to renounce its debts. So much so that avoiding such an example is one reason Germany in the next 72 hours may decide to resume the Greek bailout after all.