Europe and Greece: Every option is on the table…except doing the right thing

Dan Mitchell at the Cato Institute in Washington concisely outlines the scenarios for the Greek crisis.

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Good money after bad...
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Daniel J. Mitchell
On 24 May 2011 19:13

Veronique de Rugy of the Mercatus Center has a very good – but somewhat depressing – analysis of the fiscal crisis in Greece. She basically concludes that bailouts will continue because nobody in Europe is willing to do the right thing.

This got me thinking about what I expect to happen. Here are the options, along with my (admittedly wild) guesses about their likely implementation. They add up to more than 100 percent because I think the Greek government (aided and abetted by their German and French enablers) will adopt more than one of these options.

Indeed, the only option that is completely unrealistic is doing the right thing and reducing Greece’s bloated public sector.

My CYA (Cover Your Ass) disclaimer is that these are the probabilities for the next two years.

New Bailouts – 40 percent chance of additional funds from European taxpayers (via the European Union) and/or from world taxpayers (via the IMF).

Default to Private Bondholders – 25 percent chance of default (a.k.a., restructuring) of at least some portion of the money owed to private investors. This number would be higher if it wasn’t for the next options.

Restructuring of Prior Bailouts – 50 percent chance of an indirect bailout by restructuring existing loans from the European Commission and/or IMF.

Indirect Bailout from the ECB – 80 percent chance of additional purchases of Greek government bonds by the European Central Bank.

More Tax Increases – 65 percent chance of additional significant tax hikes. I’m tempted to make this 100 percent, but I think even the Europeans realize that Greece is probably on the wrong side of the Laffer Curve. As such, more tax increases would reduce revenues for the government.

Leave the euro – 10 percent chance that the government will abandon the common European currency. It may seem like I’m not giving enough consideration to this option, particularly since going back to the drachma would give the government the ability to screw bondholders with inflation. Veronique’s article explains why this might not be an attractive option, but I’ll add one further point. The European elite passionately favor centralization and the common currency is a symbol of centralization. As such, they will provide endless amounts of bailout money before allowing something that would be interpreted as a violation against their secular religion of “ever closer union.”

Real Spending Cuts – .0001 percent chance of meaningful reductions in the burden of government spending. Why do the right thing when you can get taxpayers from Germany, Netherlands, and other nations to subsidize your corrupt fiscal regime?!?

Daniel J. Mitchell is a Senior Fellow at the Cato Institute, the free-market, Washington D.C. think tank. His articles are cross-posted on his blog, by agreement

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