The $146 billion bailout package approved this weekend for Greece is advertised as a move to "stop the worst crisis in the [euro]'s 11-year history," but it is having exactly the opposite effect.
First, the bailout, which effectively kicks Greece's pending default forward, has not solved the problem that the cost of debt service for the PIIGS countries is increasing. That's in part because this is not actually a problem. The question is not why Greece has to pay such a high yield on its bonds but why Portugal and other on-deck defaulters have to pay so little. The bailout was supposed to put debt buyers at ease about Europe's overleveraged states, but because it only allows these countries to take on more debt, it has not.
Second, while German Chancellor Angela Merkel is taking credit for bringing in International Monetary Fund support and forcing some tougher fiscal-cleanup conditions on Greece, the bailout does not address the counterproductive elements in Greece's own so-called austerity package, including currency controls and cash-transaction limitations that will only slow the country's economy. "This is an ambitious program that contains tough savings measures and on the other hand seeks to improve the efficiency of the Greek economy," Merkel says. That may be true, but there is no math by which you can collect more taxes while reducing private sector economic activity.
Third, the move has only irritated German and French voters who are outraged at having to pay for the wastrelsy of a country that, it is now clear, should never have been a euro participant in the first place. Elections rarely turn on foreign affairs in any country, and the Financial Times' Quentin Peel makes the case that the Greek bailout will not have a big impact on this week's vote in North Rhine-Westphalia. But if the goal of the aid package was to build confidence throughout the euro zone, it doesn't seem to have accomplished that either.
Fourth, the status of the euro itself has been undermined, not strengthened, by the bailout. No doubt some Keynesian Klown will pop up to blame this development on "speculators," "ratings agencies," or the biggest devil of all, "markets." Back on Planet Earth, futures traders, who get rewarded by guessing correctly what will happen to an asset, are hammering the euro. BusinessWeek reports:
The euro has depreciated 7 percent this year, including last week's 0.7 percent loss, as growing concern that the sovereign debt crisis will slow Europe's economy reduced confidence in a region whose $13.6 trillion gross domestic product is exceeded only by the U.S.
"Greece is a Lehman Brothers for the sovereign world," Robin Marshall, who helps oversee $20 billion as director of fixed income at Smith & Williamson Asset Management in London, said yesterday. "A 100 billion euro package is a big amount and it might help to buy Greece some breathing space, but as an investor I'm still cautious. Policy makers can promise what they like, I still have doubts that the Greeks will have the stomach to take these tough measures."
Fifth, Marshall's doubts are well founded. As they have shown throughout this crisis, Greece's strong and ancient socialist institutions can only respond to market discipline with violence. From the London Times:
May Day protests in Greece turned violent yesterday as youths in gas masks and hoods set fire to vehicles, smashed shop fronts and threw molotov cocktails and rocks at police in an explosion of fury over austerity measures they claim will hurt only the poor.
Tourists were cut off from their hotels as thousands of communists, civil servants and private-sector workers converged on a main square in Athens to vent their rage at the European Union and the International Monetary Fund (IMF).
"No to the IMF's junta," they chanted as a youth in a black hood produced a hammer to try to smash windows of the luxury Grande Bretagne hotel.
Another painted anti-capitalist slogans on the facade, and demonstrators intervened to prevent him from spraying an Australian woman with paint as she tried to get back into the hotel. Japanese tourists stood taking photographs of the mayhem with mobile phones before being forced to retreat, coughing and sneezing, under a cloud of tear gas.
So you have politicians defying the will of the voters to pour more water into a leaky bucket; transnational economic planners destroying a currency in order to save it; markets responding to those actions with predictable horror; and the few recipients of all the largesse too dumb to say "Thank you." This is apparently what EU stability looks like.