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In reply to the discussion: EU Tells Tsipras the Party’s Over as Euro Exit Door Swings Open [View all]FarrenH
(768 posts)was laid out for me by a pol. sci professor friend: The USA has unified monetary and fiscal policy. While states have some control over their finances, a large amount of their revenue comes from federal revenue and they can't run individual deficits funded by private lenders. The Eurozone, in contrast, has unified monetary policy in the Euro, but many disparate fiscal policies. This is a structural weakness that eliminates some options normally available to governments.
I'm deeply sympathetic to Greece's plight and think that reckless lending by an industry that was criminally negligent in most of the noughties colluding with successive governments that had a perverse incentive to hide the problem from their electorate made Greece's debt balloon to unsustainable levels (1999, 94% of GDP, 2010 when the first Eurozone bailout happened, 164%). So the "lazy and profilgate greeks" trope sold to French and German voters by not only politicians by the press, is totally inaccurate. Working Greeks work longer hours than Germans.
And if Northern European banks (encouraged and backed by French and German changes to make their banking sectors more competitive) had exercised their obligation to do proper risk assessment in the noughties, instead of not merely supplying loans, but (along with American banks) helping the Greek government hide the debt, the problem would have come to a head a decade ago. That would have toppled past governments that actually caused the problem and confronted Greeks with a much smaller problem, for which the medicine would have been far less painful. The Greek economy could actually have recovered from it, with social welfare and pension spending diminished but still much more of it in place. Ignoring, for the sake of argument, the fact that austerity is the wrong medicine from macroeconomic consensus, which is another dimension of the problem.
But the crisis has exposed two problems: One is the fundamental structural weakness of the Eurozone caused by central money policy/local fiscal policy. And the other is moral hazard, as ably argued to me by my professor friend. Even if, as I believe (as do Krugman, Stiglitz, Picketty and many other economists), austerity is absolutely the wrong medicine across Europe, and *even if a Greek bailout with more favorable terms is actually the right thing to do from a macroeconomic perspective* - if the Eurozone supplied a second bailout with extremely favorable conditions that would be a political precedent with troublesome consequences. Basically, there's nothing to stop any Eurozone member in future saying "well now we can just run an unsustainable deficit to provide services that will buy us votes, and force future governments to go cap in hand to the Eurozone, citing Greece as precedent". IOW, it introduces a perverse incentive for all other peripheral economies in the Eurozone to behave badly.
So a nexus of political and economic considerations may be forcing the hand of all parties in this mess, producing a sub-optimal result for both Greece and the Eurozone, and perhaps we shouldn't be judging the troika too harshly, even if we're sympathetic to the plight the Greek people find themselves in, which is akin to discovering that the scheme you invested your entire pension in is actually a Ponzi scheme after you've benefited substantially and that you'll be materially worse off than you would have been if you'd never invested because you now have to pay off other victims of the scheme.