The European Union's Greece Bailout Problem

By Mary Kate Cary, Thomas Jefferson Street blog

The European Union arranged a $1 trillion rescue package over the weekend, surpassing our giant bank bailout. The E.U. is trying to ease fears in the markets after riots in Greece took place recently, in reaction to government-imposed austerity programs put in place to ease massive deficits. Similar deficits are facing the governments of Spain and Ireland, although not as bad as in Greece. But there are problems with the bailouts--not only financial ones, but moral ones--according to this morning’s New York Times:

And as details crystallized of the package’s main component—a promise by the European Union’s member states to back 440 billion euros, or $560 billion, in new loans to bail out European economies—the wisdom of solving a debt crisis by taking on more debt was challenged by some analysts.

“Lending more money to already overborrowed governments does not solve their problems,” Carl Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., said in a note. “Had we any Greek bonds in our portfolio, we would not feel rescued this morning.”

Such concerns may be part of the reason the Euro fell back when American markets opened, after surging in Asian and European trading, to end the day at about $1.28.

Another big issue is whether bailing out economies creates moral hazard. Other countries may continue to skirt the kinds of actions that would lower their budget deficits and debt loads—steps painful to the public and dangerous to politicians—because they too can expect to be rescued.

Yesterday morning, David Walker, author of Comeback America and former comptroller general of the United States, said that unless we rein in the fiscal mess here, the American economy is two to three years away from what’s happening in California and New York, and 10 years away from Greece. It’s a common-sense question: How does spending more solve the problem of too much spending? How does taking on more debt solve the debt problem? If you watch Walker’s interview on Morning Joe on MSNBC, you’ll hear some pretty shocking statistics about how bad things are here, and what needs to be done. It’s quite shocking in a common-sense way and it doesn’t take long to watch. If you don’t do anything else today, watch this video. Hopefully a few elected officials will get the message soon.

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