The Big Fat Greek Bailout
The Obama Administration on Sunday approved U.S. participation in an international bailout of Greece that will cost American taxpayers billions of dollars. Despite the objection of many members of Congress, the President went ahead with the bailout, thinking that $145 billion would be enough to bring Greece out of its economic malaise and restore stability to the global economy.
On the contrary, the President’s willingness to pump billions into a small European country such as Greece makes it more likely that other European countries with similar problems – namely, Spain, Portugal, and Italy – will be coming to the United States soon looking for even bigger bailouts.
First, some background: Greece’s economic crisis was caused by too much government spending and borrowing which weakened its already over-taxed, over-regulated economy. Although Greece’s population is just 11 million, it has more than one million public-sector employees. Greek civil servants enjoy 14 months of pay for 12 months worked, and their average retirement age is 53. Once retired, they enjoy generous pension benefits worth 80% of their salary. Greece will run a budget deficit this year worth 14% of its GDP, and its entire national debt will equal 113% of GDP. These policies proved unsustainable, and so the European Union and the IMF were called in to rescue Greece before international investors stopped lending them any more money.
The $145 billion bailout comes to $13,000 per person in Greece. An equivalent bailout of America — which has a population of over 300 million — would cost over $4 trillion. With such a large amount of cash being thrown at Greece, the bailout has to work, right? Well, according to the IMF’s own optimistic forecasts, even if Greece implements the austerity measures required by the deal, it will still run huge budget deficits indefinitely. So huge, in fact, that Greece’s debt-to-GDP ratio will soar to 150% in just four years.
That’s why global markets reacted so badly to news of the deal. The Dow Jones dropped over 600 points in the week after the bailout was announced, and bond yields in Europe rose substantially (indicating fear that European governments won’t pay off their debts). While bailout supporters said the market volatility was proof that Greece needed a bigger bailout, in truth, it shows that markets don’t think the Greece deal gets to the root of the problem (too much government spending and borrowing) and makes a costly bailout of Spain, Portugal, and Italy more likely.
Which brings us back to President Obama. As we saw in 2008, when a small bailout of Bear Stearns was followed by a big bailout of Fannie Mae and Freddie Mac, which was followed by a mammoth bailout of Wall Street, bailouts are like potato chips – you can’t stop at just one. Now, the President is taking us down a road where the U.S. is participating in bailouts of European governments whose Socialist policies have been very generous to their people, but whose costs have become too exorbitant to pay.
And what would the cost of such a bailout look like? Given that Portugal is about the same size as Greece, their bill would probably be over $100 billion. Piero Ghezzi, an economist at Barclay’s Capital, estimates that Spain may need a $450 billion bailout. As a larger economy, Italy may need even more. At a time when America is already borrowing 43 cents of every dollar it spends, does it make sense for us to borrow even more money (much of it from China) to help bailout Europe? Wouldn’t it make more sense to ask Europe to solve this problem without U.S. tax dollars?
After all, the countries which make up the European Union are analogous to the states within the United States. The EU has its own currency and central bank, just like the U.S. Knowing that, asking the U.S. to help bailout European countries is almost like asking Europe to bailout California, New York, and New Jersey. Governors and mayors across America are having to make tough choices, and that’s precisely what Europe should do. By aiding a Greek bailout, we are making it less likely that other European nations will make those tough choices.
Bailout supporters, of course, talk about “contagion.” In other words, by forcing Europe to make tough choices – choices which may slow their economic growth in the short-term – we risk “contagion” from their economic slowdown. I disagree; in fact, the real danger of “contagion” comes from the virus of government spending and borrowing. If the U.S. is required to spend and borrow tens of billions of dollars on European bailouts, that only makes the U.S. more vulnerable to such a “contagion.” By refusing to participate in European bailouts, the U.S. is doing Europe a favor by ensuring they take the necessary fiscal reforms to ensure a long-term recovery.
We don’t expect the Obama Administration to understand this. The whole premise of “Obamanomics” is that government spending and borrowing eventually lead to prosperity. In truth, if you want to see the consequences of “Obamanomics,” take a look at Greece today. Or look at Spain tomorrow. That is America’s future unless we reverse course, and do it soon.
The U.S. is in the midst of its own debt crisis. The Congressional Budget Office predicts that America’s debt held by the public will reach 90% of GDP within ten years. Without dramatic spending restraint, the U.S. is on a path towards its own Greek tragedy.
Even before Greece, America was suffering from bailout fatigue. But now that the Greek deal has been approved, the prospect of more European bailouts isn’t over; in fact, it’s just begun.