Almost two years ago, I wrote that bailing out Greece was misguided because it would dig the debt hole deeper.
More recently, I wrote an I-told-you-so post that looked at my four original predictions and patted myself on the back for being accurate (not that it took any special insight to conclude that bailouts would make things worse).
But now it’s time for a turbo-charged I-told-you-so post. The UK-based Telegraph has a remarkable story about the chaos in Europe. This passage is a good summary of the circular firing squad.
Just when the eurozone governments thought it could not get worse for Europe’s single currency, it did.Shell-shocked EU finance ministers meeting in Brussels on Saturday were already reeling from the worst Franco-German rift for over 20 years and a fractious failure to resolve the problems that have brought Greece, and the euro, close to the brink.But then a new bombshell hit as a joint report by the EU and the International Monetary Fund (IMF) warned that, without a default, the Greek debt crisis alone could swallow the eurozone’s entire €440 billion bailout fund – leaving nothing to spare to help the affected banks of Italy, Spain or France.
And to understand how the situation is so dire, here are some additional details.
Compounding the trauma, Christine Lagarde, the French finance minister turned IMF chief – and one of the few key players who appeared to be enjoying herself in her new headmistress-like role – issued a grim warning to her former European peers. The IMF would no longer be willing to pick up a third of the total bill for rescuing Greece, a contribution worth €73 billion, unless European banks were prepared to write off 50 per cent of Greek debt. “It was grim. The worst mood I have ever seen, a complete mess,” said one eurozone finance minister.
But here’s the key passage of the entire article, where the German Finance Minister correctly complains that the crisis is now three times as costly thanks to previous bailouts.
According to insiders, Wolfgang Schaeuble, Germany’s finance minister, could not resist taking an “I told you so” approach – he had been, after all, the first to call for an “orderly” default for Greece 18 months ago, at a time when the cost of such a move was less than one third of the price today. “Schaeuble is a man who does not mince his words, whose reputation for harshness and arrogance is well earned. He was, frankly, unbearable,” said one diplomat.
This is similar to the point I made in my post about whether the bailouts would work. But as I noted above, there was nothing profound about my predictions. Sort of like predicting water runs downhill.
The amusing part of the story is the infighting among Europe’s politicians.
Interpersonal relations between eurozone leaders have hit an all-time low, reflecting sharp disagreements between Germany and France over using the ECB to bailout the euro and presenting an additional obstacle to finding a “grand solution” to Europe’s debt crisis. Nicolas Sarkozy’s “two faced” personality has been cited as a major factor in his dysfunctional relationship with Angela Merkel. …A row between the pair in Frankfurt on Wednesday overshadowed leaving-do celebrations to mark the end of Jean-Claude Trichet’s nine years as the head of the ECB. “Their shouting could be heard down the corridor in the concert hall where an orchestra was about to play the EU’s anthem, Ode to Joy,” said an incredulous EU official.
And the depressing part of the story is how one of the chief Euro-crats is trying to use the crisis as an excuse for more centralization in Brussels.
Herman Van Rompuy, the EU president who is regarded by many as too close to Berlin, angered many countries when he made confidential proposals for the creation of a European finance ministry. His plan, which has considerable backing from the growing body of EU bureaucrats who see a unified EU treasury as the only solution to the problem of countries spending more than the euro can stand, would mean a centralised body able to override national budgets and enforce cuts on profligate governments.
I doubt this terrible idea will be approved, but the final outcome won’t be pleasant.
The worst-case scenario is that American taxpayers somehow will get suckered into participating in a bailout. The Senate has voted against subsidizing the failure of European socialism, but Obama has said he wants American taxpayers to participate in a bailout and the White House may use the Fed or some back-door mechanism to unilaterally link America to Europe’s sinking ship.
[…] also may be thinking this is just another excuse for me to say “I told you so” about the failure of bailouts. Sure, I’m happy to pat myself on the back, even though any non-comatose person should have […]
[…] prior bailouts have given Greece an excuse to avoid reforms. Though the IMF, ECB and European Commission (the so-called troika) have learned somewhat from […]
[…] for the past five years, events have confirmed – over and over again – that this was the right […]
[…] I wasn’t bashful about patting myself on the back later that year when it quickly became obvious that bailouts weren’t […]
[…] it doesn’t require much insight to know that statism won’t work, as I acknowledged in my I-told-you-so post. Rate this: Share this:PrintEmailFacebookTwitterMoredeliciousDiggFarkLinkedInRedditStumbleUponLike […]
[…] don’t work. This also was a powerful lesson. Imagine howmuch better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have […]
[…] Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have […]
[…] don’t work. This also was a powerful lesson. Imagine howmuch better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have […]
[…] Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have […]
[…] Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have […]
Yes the US should set a leadership example.
For that we need a leader, however…
[…] Given the turmoil in Europe, I suppose I should say something serious about Greece, economics, and public policy. […]
A Daniel come to judgment! Yea a Daniel! O wise young judge how I do honour thee!
Contrary to Dan Mitchell’s assertion in his closing arguments, the worst case scenario may not be with president Obama finding a back-door mechanism to unilaterally link America to Europe’s sinking ship, as he so confidently assumes, but rather such worst case scenario, would be for the US to forfeit any claim as the leader of the free world.
Greece hasn’t been a world empire since the days of Alexander the Great some 2,333 years ago, and the rest of the EU are in no mood of claiming any world leadership role. That leaves the US as the only credible power (both militarily and financially) with the greatest stake in world stability, unless one would like to see China fulfilling the inevitable void which will result from an irresponsible denial of help to trusted allies.
Saving Greece from their unenviable financial predicament is more than just Dollars and Euros. For the EU that would be a matter of financial stability alone, but for the US it will also be a matter of national security as well.
Socialism?
It’s not Socialism. It’s Hope and Change.
Dear Dan,
I have just returned from Greece where I have witnessed the continued and misguided actions of the present government relative to its handling of the bailout negotiations. I have a different take.
The Troika’s assault on the sovereignty of Greece needs to be sharply rebuffed. I have maintained for years that Greece should unilaterally repudiate its debt as it stands and restructure existing bonds at no more than, say, 20%. Interest arrears would be off the table in my scenario. Clearly, easy credit fueled the socialist practices of current and previous Greek administrations and it is clear, as well, that no one was minding the shop as the nation ran up a tab of $400 billion. What is done is done. But, make no mistake about it, the longer a default is forestalled the greater the cost will be to both Greece and its European lenders.
The strongest expressed argument coming from the Eurozone against a voluntary default is that it would lead to “contagion” that would spread to other countries. But contagion is precisely what will be precipitated by straight-jacketing the Greek economy with austerity measures that will deepen an already deep recession. These austerity measures will almost guarantee that the growth needed to pay an increasing debt obligation is precluded. Furthermore, no bailout is worth the loss of sovereignty that is sure to follow at the hands of the bureaucrats in Brussels who already are making noises about not having enough control over a sovereign nation’s budget.
There is no ignominy in being associated with an Argentine-styled default. Certainly no more scorn could possibly be heaped on Greece than by those who have taken to the airwaves and speak of the country’s “moral collapse.” There is life after default. Argentina is proof of that.
I would give the Eurozone lenders a take it or leave it offer. Either take the proffered haircut or Greece returns to the drachma, converts existing debt at the old exchange rate, prints money and thus ends up in the same place but for the fact that credit-card-toting bureaucrats will not be telling Greece how it should run its internal affairs. This path of devaluing the currency will work though the country will be excoriated in the European and American press and the economic, social, and political flak in the short term will be unceasing.
The unarticulated reason for protecting Greek bond-holders, and the raison d’être for the Eurozone in the first place, is that Germany covets as many captive, non-manufacturing markets for its products as it can stand on the backs of its own citizens. Greece’s entry into the European Union proved to be a Faustian deal and it now needs to be repudiated.
For all of the talk about how Greece can not be trusted to pay its debts unless it puts up sufficient collateral – some countries have suggested including the Parthenon and some Greek islands as collateral – maybe negotiations between Greece and its lenders should start at the very beginning.
Maybe the point of departure should start with the Romans’ endless pillaging of Greece, or the savagery of the Franks during the Fourth Crusade, or the horrific raping of the Parthenon by the sadistic Venetian Morosini who was hailed at home for his bestiality, or by the thievery of Lord Elgin who to this day is defended by Britain for his actions, or the depredations of the Franco-British legations who attempted to destabilize the nation during the First World War, or the incalculable death and destruction suffered at the hands of the Germans and the Italians during the Second World War.
I believe that if Greece calls in all of these IOU’s Greece and its European lenders will be all fair and square.
The Greek crisis will either be resolved, or resolve itself one way or another… but the fundamental forces of European decline will not only remain, but accelerate.
Amongst Europeans there is too much emotional capital and political interest vested into the idea that European unification and solidarity (read, redistribution and central planning) are the path to prosperity. Any undoing of this fundamentally flawed hope will always lag behind reality. 99% of Europeans grossly misunderstood that the US prospered IN SPITE of unification, not BECAUSE of it.
So this is what will happen in Europe:
European Intra-nation redistribution and central planning (Socialism) will expand to Inter-European redistribution and central-planning,
Further lowering of incentives to excel, further resignation to complacency in mediocrity,..
Further flattening of the already low slope effort/reward European curve,…
European growth will degrade from an already suicidally anemic 1-2% to 0.5-1.5%. The rest of the world moves on at 4-5%, Europe fades away into worldwide averagedom within a few decades. The process is already well under way.
Your next post describes the ideas of HopeNChange finally taking root in America (“Hey, that European grass is pretty green!”)
Genghis Khan takes no prisoners.
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While ideologically important, the real effect of US participation in the Euro-bailout is minor.
America is becoming a European style, decreased competitiveness, sinking ship all by itself. Any effect the Euro-Sinking ship will have on the US is secondary.
After careful consideration, one can conclude that there are no ‘accidents’ in monetary or economic outcomes. Economic planning involves determining a specific outcome, and then setting forth on a plan of action to achieve the desired goal. We must consider the possibility that the outcomes as outlined in your previous prognostications are not the result of miscalculation or stupidity, but that of deliberate design. The only question left begging is what might the actual goal be?
What they are doing is recognizing that a drowning person can’t swim very long with a 100# weight on their neck, so they are dumping us in the pool to help with a 100# weight on our neck as well. And tying us to that drowning person. Great plan.
Our incompetent and irrelevant Senate has come out with a proclamation that they are disinclined to do this. Something about their having a glimmer that european socialism isn’t working and that maybe mutually assured economic destruction isn’t a good idea. Won’t matter because King Presbo has already decided:
…”we have pledged to cooperate fully in working through these issues, both on a bilateral basis but also through international and financial institutions like the IMF.”
Just an intellectual curiosity to see what mechanism he uses to ignore the Consittution and do it anyway. I mean, really. We probably have spent more than that on turtle tunnels.
Cloward and Piven would be so proud.
Accurate prognostications are no requirement for popularity as an expert. It is a mystery.