By: Scott Redler
The European Union’s answer to irresponsible behavior from its members? Give a new life line. Solve debt with debt. Well, spoiled children always grow up dysfunctional.
Rewarding nations for overspending and underdelivering is a dangerous precedent. European officials are employing the same strategy as the U.S to deal with excessive spending. Rather than dealing with troubled companies, as was the case in the United States, the Euro-Tarp is being forced to save COUNTRIES that can no longer pay their bills. Indtead of being threatened with the collapse of financial institutions, Europe was faced with the prospect of a crumbling continent.
“Euro-Tarp” gives money to countries that have disregarded basic economic principles. In short, it rewards bad behavior, which is the last thing any policy should do. The people in these European nations want to retire before 55, get two months bonus, and receive guaranteed percent increases each year on their pension. The Greeks are rioting in the streets because they think it would be unfair if those figures got changed. Greece is the first, but not the last, country to get aid. It was bailed out for having a budget deficit equal to nearly 13% of its GDP, and debt–to–GDP ratio of 113%! Portugal, Ireland, Italy and Spain are in similar trouble, and most of the rest of the 15 countries that use the Euro are only slightly better off. This fiasco spells huge trouble to me. The systems are broken and band-aids will only temporarily stop the bleeding, not fix the patient. Europe needs major reconstructive surgery.
That trillion dollars going to these troubled governments and spoiled individuals will no longer be available to the successful individuals or firms that deserve it. The ones that played by the rules will find loans more expensive, capital for growth harder to come by, and taxes higher. Greece’s long term borrowing costs plunged from 12.4% to 6.5%, and Germany, which provided the bulk of the bailout funding, saw its rates rise. It was the same way when I recently refinanced my home. I got a higher rate from my bank than my neighbor who hasn’t paid his mortgage for 6 months and qualified for a “modification”. How is that fair? But this is how moral hazard works: By bank-rolling irresponsible governments and firms, a new generation will learn that virtuous behavior will be punished and bad behavior rewarded.
The way out of this is make countries balance their books. Tough austerity measures are required if we want to fix the broken systems, rather than dump off our problems onto the next generation. Face today’s problems today. Once again allow the private sector to drive growth and innovation by slashing taxes and keeping borrowing costs low for those who deserve it. Put an end to the bureaucratic entitlements built into legislation and fix the broken, bloated state pension system that could turn into our next major problem.
I’m just a technical analyst, but accountability and common sense needs to be restored to our world. If we continue down this dangerous path, I fear for the next generation.
