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The EU and Greece: A 17 Billion Dollar Throw of the Dice

The austerity package that passed the Greek Parliament and the parallel injection of credit is a major gamble that could make things worse.
By Amiel Ungar
First Publish: 6/30/2011, 5:02 PM / Last Update: 7/1/2011, 12:06 AM

It has been said that statesmanship consists of choosing the lesser evil. The European Union believes that another bailout of Greece is the lesser evil compared to debt restructuring, giving creditors only part of their money back or giving it back in full later than was originally contracted.

The economic wise men of Europe have chosen to buy time and have postponed the day of reckoning by pumping in an additional $17 billion to stave off a Greek default. They are trading money for time in the hope that the semblance of economic stability will allow the major countries with debt problems such as Spain and Italy to regroup.

The theory is that if Greece defaults, it will create a chain reaction that will engulf the rest of Europe's deficit plagued economies and lead to the collapse of the international banking system.

However, the chorus of skeptics is growing. If the time that was bought succeeded in producing a dramatic economic turnaround and growth spurts, then it would have proven to be a sound investment.

However, for many economic analysts the belief that austerity triggers growth is the modern day equivalent of the medieval credo quia est absudum, the slogan adopted by some church scholars that means "I believe what is absurd". For the skeptics the numbers simply do not add up.

Take Louis Woodhill in Forbes magazine:

Does no one think it odd that the E.U. expects Greek unemployment to average 14.6% for all of 2011 when it registered 15.1% in January, 15.9% in February, and 16.2% in March?

It is one thing to call for sacrifice if one genuinely believes that the pain will eventually produce gain. If the prognosis is that austerity will merely compound the problems of Greece, then exhortations for self-abnegation will fall flat. If the solution is ultimately dependent on the shape of the European or global economy, then any degree of self-sacrifice will ultimately prove of no avail if the broader picture is stagnant.

In a sense is fortunate that the European Union and the IMF did not succeed in Greece the way they succeeded in Portugal by enlisting both government and opposition in favor of the austerity plan. If austerity succeeds, Premier Papandreou will be credited with Churchillian courage. If it proves a failure, at least the public will be able to turn to a loyal opposition that rejected the austerity policy rather than to the anarchists.

In this sense Greece is more fortunate than the European Union. The major players in the EU have effectively pledged their reputations to a second bailout. If it fails, the result will be more than a credibility gap; it will be a gargantuan crisis of confidence. Those countries that the EU sought to protect will be even more grievously endangered.

It is hard to say what would be worse: economic bankruptcy or the sudden political bankruptcy of the European elites. Even those who would like these occasionally sanctimonious elites to receive a comeuppance, would not want to see their sudden and ruinous collapse.