The Greek Bailouts Are Incredibly Stupid
Long-term problems will not get fixed by imposing short-term pain.
The Greek bailouts have been incredibly stupid. There, I’ve said it. Let’s put aside the debate over whether rescuing Greece was a bad idea in the first place; a complete collapse of its economy might well have led to social unrest and even conflict. But how the Europeans and their cohorts at the International Monetary Fund (IMF) bailed out Greece was amazingly, insufferably stupid.
The world has seen plenty of bailouts in the past, some that worked and others that didn’t. Argentina’s by the IMF in 2000 and 2001 didn’t work, because the peso was so overvalued that there was no way to make the country’s debts sustainable. Ireland’s bailout by the European Union in 2010 succeeded, in the sense that the country paid its way out of the program on schedule three years later, though its economy was still on a fragile footing.
But Greece is neither Argentina nor Ireland. As a percentage of the economy, its public debt is much higher than Argentina’s was. Its business environment is nowhere near as dynamic as Ireland’s in the views of the World Bank and the World Economic Forum. And Greece’s shadow economy — the portion that doesn’t pay taxes — may be the biggest of the three.
None of these problems has a short-term solution, and yet that is exactly the template that both of Greece’s bailouts have taken. Greece is still in crisis talks with its creditors because the payments it has been expected to make and the reforms it has been expected to implement have corresponded to unreasonable short-term expectations.
Put simply, the problems in Greece have long-term causes that will only have long-term solutions. A public debt as big as Greece’s — currently more than 170 percent of its GDP — does not go away overnight, even with the harshest austerity measures. It will only erode during an extended period of robust economic growth as well as restrained spending. Austerity might make it possible for Greece to meet its payment obligations in the short term, but what’s the point if the economy is crippled in the long term?
Greece’s climate for business won’t turn into a world-beater in just a few years, either. Improving protections for investors, curtailing corruption, strengthening property rights, and — crucially — enhancing the enforceability of contracts are all on Athens’s to-do list, but the cultural and legislative changes they require will take time. Indeed, it would be a mistake to rush hastily written laws on such fundamental matters through the Greek parliament, especially without building widespread public understanding and support.
Finally, it’s foolish to believe that Greece will turn into a nation of chastened and loyal taxpayers in just a few short years. Tax avoidance or compliance has a variety of deep social roots; it can be affected by factors as diverse as religiosity, class divisions, individual psychology, and perceptions of fairness. Though some incentives can increase compliance with the tax system in the short term, the commitment to pay taxes has more to do with a feeling of stakeholdership and justice — something Greece, with its fractured politics and current disillusion, will need time to manifest.
It’s true that governments may have an easier time making radical changes to their economic systems in the midst of a crisis; the restructuring of the American banking system and monetary policy pays ample testament to that. But when such changes require an economic sacrifice — like the austerity program imposed on Greece — the optimal timing is less clear. The pain felt by Greeks would be far less if its reforms were spread over an entire economic cycle. The issue is that the reforms might feel less urgent during a boom.
Still, that’s no excuse for the death by 1,000 short-term conditions inflicted on Greece. The bailout backers set their criteria based on what they thought Greece should do, rather than what Greece was capable of doing. They were also preoccupied with ensuring Athens would work hard for each tranche of bailout funds, rather than ensuring Greece’s process of reform would be as smooth as possible. Given these disjoints, it’s no surprise that Greece may need a third bailout to avoid defaulting on its debts. A series of short-term cures will never solve a long-term problem.
But officials in Frankfurt, Brussels, and Berlin never showed enough interest in the overarching challenges in Greece’s economy. Their goal all along has been to maintain the integrity of the eurozone, despite its flaws, as well as their own infallibility. Ironically, they might have been closer to their goal had they thought less about themselves and more about the Greeks.
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