Robbing Peer to pay Pavlos

by on 28 April, 2010

Europe should not rush to bail out the failing Greek economy, writes Michael G.

Events unfolding in Europe at present are a timely reminder of the evil of wealth redistribution, which punishes prudence and rewards recklessness. A group of countries, but one in particular (Germany) are preparing to bail out another (Greece) due to its reckless level of government spending.

Germans are characteristic savers; Greeks are typically spenders. Germany operates a sound and corruption-free taxation system; Greece’s is riddled with fraud and abuse. Germans work until they are 67; Greeks retire at 58.

Yet Germans, who save, are honest, and work long years, are about to begin funding those who do not share these admirable characteristics. The earnings of a working 66 year-old Bavarian will provide for the pension of a retired 59 year-old Cretan.

Such is the outcome of the joint European Union-International Money Fund bailout, which, like all flawed government programmes, prioritises the short term at the expense of the future. The short term outcome of the bailout is to ensure that Greek bondholders are repaid and immediate crisis is averted, and this will be accomplished.

Yet the bailout reinforces the long-running causes of Greece’s ails: it provides the country with even more debt, subsidises its accumulation, and postpones the painful yet necessary austerity measures a bankrupt nation must undertake. Just like the last thing a heroin addict needs is another high, so the last thing a debt addict needs is ever more debt.

The Germans should follow from their own admirable saving habits and steadfastly refuse to spend. This will precipitate the real crisis that Greece requires. An inability to spend is exactly what Greece needs, and exactly what the financial markets will ensure if not for EU-IMF intervention.

There is no question of the level of temporary pain this is for Greeks—deflation, falling incomes and unemployment—but it is necessary pain for long term growth. It is the kind of natural, logical outcome that any person or company would have to endure. It is why we consider spending recklessly to be a bad thing: because it results in terrible consequences. Removing the obstacle to these consequences merely facilitates and encourages more of the problem at hand.

Providing the crisis plays out as it should, it is of immense benefit to the Greeks, for it provides them with that most important economic resource, information: that excessive debt and reckless spending is the primrose path to hell, and honesty and prudence is the tough road to heaven.

Michael G is completing studies in finance and history at Flinders University and works at Bendigo and Adelaide Bank.

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