Signs Of The Apocalypse: A Bailout For Europe’s Weaklings

It is more likely by the day that Greece will be helped out of its sovereign debt problems and that Spain and Portugal may, too. The most likely avenue for a rescue as a guarantee of debt by EU nations, led by Germany which is the largest nation in the alliance based on GDP. The other option often discussed is that the IMF would give funds or loan guarantees.

The reasons for a rescue are self-centered. The capital that would flee Greece could affect the entire European economy and the value of the euro. A default on the nation’s sovereign paper would also hurt large banks in the region because many hold Greek bonds.

Part of any rescue would be that Greece would have to tighten its economic belt to cut its deficits quickly. That is a prudent approach which the Greek government will almost certainly accept, but it is one which may be impossible to enforce.

Major unions in Greece have already begun to strike due to concerns about wage cuts and layoffs. Labor unrest could still do significant damage to the Greek economy no matter how badly Germany or the IMF want to “manage” the financial activities of the southern European nation. It is one thing to get  the Greek government to cut costs and raise revenue through new taxes. It is another to get a population that is not used to paying all of their tax obligations to suddenly become more fiscally responsible.

There has been a good deal of speculation that a bailout of Greece will create a moral hazard which will tip Spain and Portugal toward default so that they can get aid from stronger EU nations and the IMF. The fears of a collapse of confidence in the financial health of Europe could certainly cause Germany and the other economically viable nations in the region to set up multiple rescues.

None of the bailouts will matter much if the recovery of the world’s economy remains weak or reverses itself. None of it matters if austerity is merely a stage show and the citizens of the troubled nations are not willing to be supporters of saving their own national economies by paying their taxes.

Douglas A. McIntyre