Posted 06/16/2011 06:44 PM ET
Greek communists gather in Athens Thursday to rally against the government’s austerity measures. Prime Minister George Papandreou vowed to stay on… View Enlarged Image
Financial Crisis: As heavily indebted Greece continues to implode, threatening to drag Europe down with it, Americans should remember one key fact: Repeated bailouts don’t work, only fiscal responsibility does.
Make no mistake: Greece’s wounds are self-inflicted. The socialist government of George Papandreou has been chronically unable to agree on badly needed cuts to push the country onto a sound fiscal path.
Now, Papandreou is fighting for his political life, trying to reshuffle his cabinet and win support for austerity reforms that will bring more European Union bailout money, even as he faces riots in the streets and demonstrations against his government’s austerity.
Problem is, Greece’s debt is unsustainable, yet the public — which voted an economically inept socialist government into office — seems to believe the welfare state gravy train never has to end. But it will. It must.
Greece owes close to $240 billion to European Union governments and banks that it can’t pay. Roughly half of that is owed to France and Germany, and right behind Greece are some much bigger debtors that really scare the Eurocrats. They include Ireland ($870 billion in debts), Italy ($1.4 trillion), Spain ($1.2 trillion) and Portugal ($290 billion).
This is why the EU has decided to throw good money after bad, doubling the size of its bailout fund from $1 trillion to more than $2 trillion. It fears political chaos, widespread bank failures and a collapse of the euro.
The bailout must be big enough, notes European Central Bank governor Nout Wellink, “to frighten the market and to convince the markets that governments are prepared to really defend, to the end of their days, Europe as it is and the monetary union.” That’s panic.
But what, really, are they defending? The Greek government’s right to spend far more than it takes in? Or the Greeks’ pathetic refusal to understand that other Europeans won’t pay for their welfare state?
As the Financial Times noted, “Even if Greece successfully raised ($45 billion) from privatizations, met all its tight budgetary goals and grew in line with the optimistic official forecasts, its government debt would still equal about 150% of gross domestic product in 2014.”
Seen in that light, the bailout really isn’t about Greece’s economy at all. It’s about saving the EU from financial contagion and political chaos. Unfortunately,bailouts merely replace old debt with new. Studies show that cutting spending, not raising taxes, is the way to fix a nation’s finances and get its economy growing.
Time’s running out. At a minimum, the recent crisis means the EU’s cradle-to-grave welfare state is dead.
In its place, Europeans need to restore a sense of self-responsibility, hard work and market discipline, and pare back their demands from government.
As for the U.S., we can neither ignore this crisis nor gloat about it. If we don’t do the same, we’ll be next.