Officials from EU governments have just now pledged to bail out the Greek government. In my view, this is a bad idea, at least for the people of Germany and France, who will bear a lot of the cost. Since I am having some trouble organizing my thoughts into fluent paragraphs, I will present them as talking points.
- The right model for thinking about the Greek government’s large and chronic deficits is the budgetary or fiscal commons. Richard Wagner says it well (in the context of the US government): “Most collective or corporate organizations, profit-seeking and nonprofit, do not suffer from continued deficits. What distinguishes the federal government from other corporate bodies is that the federal budgetary process illustrates the ‘tragedy of the commons.’ The federal budgetary process is a natural product of common property budgeting, where choice is divorced from responsibility for the consequences of those choices.” Interest groups within Greece compete for tax revenue, knowing that if they abstain, someone else will benefit from their abstemiousness. This leads to “overgrazing” of the budgetary commons, or chronic deficits.
- By bailing out Greece, other EU governments are extending the range of the commons. They are further divorcing choice and responsibility for decision-makers in Greece and in other profligate member governments.
- A Greek default need not harm the Euro very much. The strength of the Euro depends most heavily on the willingness of the European Central Bank to keep inflation low, and much less on Greece’s finances. If Greece’s default causes a debt crisis in Spain, Italy, and Portugal, this could eventually weaken the Euro as the ECB would be expected to apply monetary stimulus. But letting Greece default could also force those other governments to take their finances more seriously, and in any case, the principle of triage applies to bailouts as well as medicine.
- If the Greek government is not bailed out, as is my preference, things will sadly be very, very bad for Greece. Creditors of the Greek government would have to take a haircut; there would be no way around that. The Greek economy would suffer a long and deep depression. This would be painful for the Greek people, but the goal is to prevent something worse from happening down the road.
- Greece should never have joined the Euro because they now have no control over monetary policy. When people discuss so-called “optimal currency areas” they rightly emphasize labor and capital mobility, and factors which affect these. Perhaps one underappreciated additional issue is fiscal responsibility. If one government in a currency union is relatively fiscally responsible and one is not, then the responsible one will always be called upon to bail out the irresponsible one. If the bailout occurs, this is bad because it extends the fiscal commons, as discussed above. But if the bailout does not occur, the irresponsible government is harmed by more than it would have been if it had its own currency and monetary policy. Note that this logic applies to currency pegs as well, as Argentina learned.
- It is dangerous to anthropomorphize governments, but putting this concern aside, the right metaphor for better policy is not “austerity” but “enlightened self-interest.” The key question facing the Greek government is Can you solve the fiscal commons problem? Solving a commons problem is not about ascetic self-denial, but about far-sighted self-improvement: building the institutions that will make the country better off in the long run.
- In general, I think it would be a good thing if investors looked at sovereign debt more skeptically. First, sovereign debt is subject to the “Black Swan” problem. Second, bond markets are one of the major constraints governments face. (As James Carville said, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”) It would be better if the bond market intimidated the government sooner rather than later on the road to insolvency.
- I worry a lot about a US sovereign debt crisis. With such a big economy, the fiscal commons problem is in many ways more severe. I think Congress could overcome the commons problem in order to avoid a debt crisis, but debt crises have a very quick onset. By the time people realize it is happening, it may be too late.