Greece apparently will receive a bailout from the European Union (EU) and the International Monetary Fund (IMF) (via U.S. Taxpayers) after an agreement was announced on Sunday. I have a few thoughts that I’d like to share on the matter because it is the biggest news event of the week and I’ve been writing about the situation over the past few months.
The bailout may actually make the situation worse for Greece.
- Some economists argue that the harsh cuts the IMF will force Greece to make will make the severe recession they currently have even worse.
- Social unrest in Greece will increase dramatically in the coming days and weeks as citizens express their displeasure. There was an excellent article by the Times of London yesterday which detailed the growing social unrest in Greece. You have a situation where the young despise the old, the poor hate the wealthy, and a situation where the people despise the government for even considering working with the IMF. I suspect the Greek government is not going to survive the next election since they’ve committed economic betrayal in the eyes of many Greeks.
If the EU/IMF bailout makes the situation worse in Greece there could be even louder calls for Greece to drop the Euro by its citizens and by Greek political parties. I’m still not completely sure whether it is biblically possible for Greece to leave the EU.
The bailout of Greece may cause a lot more headaches for European leaders in the long-term.
- The bailout of Greece is going to put more financial strain on many European countries which cannot afford more financial pressure. Spain, Portugal, and Italy have deficit problems of their own, but they must each come up with billions of Euros to lend out to Greece. What the EU is asking its members to do is like the U.S. government asking cash-strapped General Motors and Chrysler to lend out billions of dollars to bailout AIG in 2008.
- The bailout of Greece may lead to further anti-EU sentiment and political problems for leaders who agreed to the bailout. The bailout of Greece is unpopular in many European countries because taxpayer funds are being used to bailout a country many Europeans feel will waste it. People who opposed the bailout of Greece may now be angered enough to actually punish leaders who supported the bailout at the ballot box or by staging protests.
- The initial amount of money that the EU and the IMF will lend to Greece is unlikely going to be enough. Greece is the EU’s equivalent to the U.S.’s Freddie Mac and Fannie Mae. Periodically Freddie and Fannie need injections of taxpayer money to stay afloat because they continually lose money. The initial amount of money that the EU and the IMF is lending is unlikely going to help Greece enough because Greece’s economy is severely inefficient and uncompetitive vis-à-vis other EU countries like Germany. Without the ability to grow its economy, Greece is going to have a very difficult time repaying its loans and staying up with its obligations without more money.
- The bailout of Greece has created a severe moral hazard in Europe. There are several European countries that are in a similar situation as Greece. Leaders in each of these countries probably will look at what the EU and IMF did for Greece and demand a bailout of their own. European leaders and the IMF are going to have major headaches when Spain, a country far more important to the EU than Greece, demands that they get a bailout.
It is important to watch what happens in Europe following the bailout of Greece because it is a preview of things to come for the United States. Like Greece, individual states cannot print money and must deal with deficits by cutting back. Also like in Greece, political leaders in individual states often lack the willpower to make the severe cuts needed to balance their budgets (ex. California). Do not be surprised if a state like California or New York someday announces that they are seeking a federal government bailout. Imagine the uproar and controversy there is going to be when that happens…
On an unrelated note, there is still one day left to vote on whether you believe in man-made global warming and to vote on whether Arial font is easier to read or Verdana font is easier to read. Your feedback in both polls is appreciated. The winner of the Arial vs. Verdana poll is the font that I will use on the blog in the future. You can cast your votes at this Link.
