There is an international condemnation of the irresponsible fiscal policies pursued by Greece for decades. The criticism borrows arguments from a parallel debate concerning the massive bank bailouts in the US. Indeed, the US budget took present and future responsibility of a huge private debt created by the greedy instincts of the financial golden boys.
Bailing out a bank, simply because it is “too big to fail” poses many moral and efficiency questions. The most important is that bankers remain indifferent for the risk they assume since they will never have to pay the bill. The state will wave first to the waiter before the bankers reach the embarrassing position of showing their empty pockets. Rationally thinking, they will underestimate risk once again and rush to the next bubble, this time with government support. If contracts are to be reinforced and incentives reestablished, why not let them carry the risks they consciously undertook? The moral hazard issue is huge and the danger for a next financial crisis lies ahead.
However, bailing out a national economy is completely different. National economies are by nature different entities, composed of political decision making. The moral issue first. It would be absolutely uncivilized to condemn the citizenship of a country to bear the outcomes of the incompetence or corruption and rent seeking behaviour of its political leaderships. More than that, it is unwise to leave the global risky investment funds to determine the fate of any national economy. The latter point is not only moral, not even primarily. It is a straightforward efficiency argument. The perception that a national economy would be left to default shall lead interest rates to explode in a series of emergent economies creating a domino of defaults. It is rather difficult for strong economies to bailout the exposure of their national banks, so they cannot insulate themselves from the crisis.
The alternative to this series of unfortunate events would be to relax fiscal policies and assume some control over intra-EU credit allocation. Could this trigger a massive relocation of international capital from the state to the private sector? On the one hand that would be welcomed in terms of private economy liquidity, boosting consumption and investment. On the other hand, government bond yields could rise to unsustainable levels. But as long as an overall default seems less likely, the effect would not be that large. In addition, international leveling of government bond yields could discourage diversification and international government competition for credit.
(This piece was writen in February 2010, some phrases perhaps copied from things I was reading this time)
