The Greek citizens have rolled the dice and voted overwhelmingly to reject the “austerity” referendum. This was a way for voters to stick a finger in the eye of their creditors. The left around the world has responded to the vote with thunderous applause—and is selling the results as a vote for “the little guy.”
The Greeks believed that voting against the debt restructuring plan would give them more leverage with the banks, the IMF and the EU. But what happens now in Greece? The banks are shutting down this week. Withdrawals from bank accounts are being tightly restricted.
Greece is formally in default on its loans and in the weeks ahead as more IMF and EU loans come due, Greece is about to slide into fiscal oblivion. This is the natural and unavoidable consequence of socialism everywhere it has been tried.
There are no “good” options for now to end this Greek tragedy. A lot of people are going to get an involuntary financial haircut—pensioners, bond holders, welfare recipients, government workers, the IMF. By voting “no” on the latest referendum, the Greek voters rejected outside help, and the conditions that come with it. That means the responsibility for resolving the crisis now rests clearly with the Greeks themselves, as it should have all along.
Greece is now sitting on $350 billion of debt. It’s unpayable and the international monetary experts are deluding themselves if they believe that by some magic stroke this nation of 11 million citizens will sometime in the future come up with the funds to repay it.
Greece is already overtaxed, and adding more taxes on the few businesses that are still functioning is only going to ensure their eventual demise too. Meanwhile the Greek citizens have come to the conclusion that fat pensions and cradle to grave welfare benefits are a human right that can never be taken away. That is what they declared in the referendum. But those benefits are going to be lost. Socialism has radically reduced the standard of living of the citizens.
All of the conventional EU and IMF solutions have been designed to give Greeks time to adjust stop their profligate ways. That hasn’t happened. The Greek citizens are simply living way, way beyond their means. This is a nation with an average retirement age of 60. This is a nation that has one in four adults unemployed and half of its young people out of work. With such countrywide levels of idleness, who is there that is working to pay for these super-extravagant benefits? Are the hard-working German citizens going to pay more taxes to pay for lavish benefits to Greek retirees? Almost certainly not. And they would be fools to do so.
Default will force everyone to take a hit. Creditors may get 50 cents on the dollar owed depending on how bleak the finances really are in Athens. Welfare benefits will have to be slashed. Pensions for retirees will be cut based on the new reality of Greece’s finances. This may seem “unfair,” but how is it fair to require young Greek citizens to pay exorbitant taxes to pay for the sins of their fathers and grandfathers. And default, at least, may provide the opportunity for a fresh start.
When Detroit filed for bankruptcy, it allowed the Motor City to in effect start over economically. The city is financially cut off from much borrowing. Government workers have been laid off. Benefits have finally been trimmed. And guess what? Detroit is making a comeback. Real estate values are rising. Construction is beginning again. In a decade, Detroit could be a financially sound and desirable place to live and do business.
One implication of this solution is that investors may start to view sovereign debt as risky, not risk free. They will charge nations—especially those that have massive unfunded liabilities—higher interest rates on their debt. Making it harder for bloated governments to borrow would be a positive development. More money would flow to private sector borrowing, and less to governments.
The bigger chance of fiscal contagion is to accede to the Greek voters’ demands for better terms of its debt repayment. If that happens every nation that owes debts to the IMF or the European Union will demand more generous terms from its creditors. Nations like Argentina and Bolivia will stop making payments on international loans and claim the conditions are too tough to repay.
The big lie is that Greece has already lived through austerity. This is a nation that in 2013 was spending up to 59 percent of its GDP on government benefits and programs. Even today the government accounts for half of all spending. How is that austerity? The problem is as the private economy shrinks, the government’s role keeps expanding. Greece’s debt was 120 percent of GDP a decade ago, and now its 175 percent. This is the opposite of austerity. It is a spendfest.
In sum, Greece needs much less socialism, and much more privatization. Sell off government assets. Cut tax rates. Sell one of the islands to Disney. Oust the communists who ruined this nation. Get government spending down to 25 percent of GDP.
As this is being written, the Greek government, despite the referendum and its inflammatory rhetoric, has resumed negotiations with its creditors. They need to hold firm, insisting that Greece finally undertake the necessary reforms that they have promised over and over to implement. Clearly, the loans so far have not averted financial crises. They have enabled them through their lending policies that trust too much in the promises of an irresponsible government. That’s the equivalent of giving crack cocaine hits to drug addicts. That story never ends well, and, alas, Greece is a tragic example of that lesson.
A modified version was originally published in Fox News
Stephen Moore, who formerly wrote on the economy and public policy for The Wall Street Journal, is a distinguished visiting fellow for the Project for Economic Growth at The Heritage Foundation. Read his research.