After Greece thumbed its nose at Greece’s international creditors by voting "no" in a referendum to their most recent bailout offer, negotiations with Greece on further bailouts should have been summarily terminated. Alexis Tsipras, the leftist prime minister of Greece, was audaciously attempting to use the vote to strengthen his hand with these creditors. He was essentially slapping in the face the people who are, in effect, giving his country money, because they are not giving enough! Greece should have been left to swing freely in the wind. With Greece then doing an about face and capitulating to Europe, that outcome will not happen – at least for now.
In the long term, such a "tough love" policy would have benefited Europe, the world financial system, and even Greece itself, although not without a lot of self-induced short-term pain. But wouldn’t a Greek default on its debts and exiting of the euro currency have caused domino effects with other financially weak countries that would have caused disaster in the eurozone? That outcome would have been unlikely because the economies of Spain, Portugal, and Italy have improved somewhat and the European Central Bank offered to "do whatever it took" to support these nations by buying their bonds – probably also a mistake, but Spain and Portugal have at least made some substantial economic reforms, on which Greece was on the verge of reneging. So financial contagion from the total collapse of the Greek small economy, which has only two percent of the value of eurozone GDP, should have been limited.
Other countries, such as Ireland, Latvia, and Slovakia have also had to take their countries out of the dark age of overregulation and undergo painful government austerity programs that temporarily raised unemployment. If Greece had been allowed to renege on the terms of its bailout, these other nations also may have backslid – for example, Spain’s anti-austerity movement also might have been strengthened.
Yet amazingly, leftist economists, such as Paul Krugman in his recent piece in the New York Times, foist the blame on international creditors for not validating Greece’s long-standing gross financial irresponsibility by canceling some of its debt:
The campaign of bullying – the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out office – was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.
What’s more, they weren’t. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients – and when their treatment made the patients sicker, demanded even more bleeding. A "yes" vote in Greece [on the creditors proposed bailout] would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work; austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.
First of all, even if the creditors were trying to get rid of the irresponsible and arrogant Greek government – they are not – they just want to try to collect some of the money they are owed. At this point, who could blame them? Also, Krugman’s Keynesian economic orientation, which erroneously believes that government fiscal stimulus creates real prosperity in the private economy, wants to artificially prop up the Greek economy so that it can pay its debts. But in the long-run, real prosperity has to be earned by haircuts to still expensive government programs, including pensions – the Greek’s are still high by Eastern European standards – and more economic reforms that deregulate the Greek economy and labor markets. Such short-term austerity is painful, but is the only thing that will return Greece to genuine economic growth – rather than a temporary government sugar high of artificial prosperity, which makes things worse in the long term. Unfortunately, apparently the long-profligate Greeks need to learn this lesson the hard way.
And Americans may need to do so too if the dollar is ever stripped its status as the world’s reserve currency. That crutch has allowed the U.S. government to amass an ever-ballooning public debt – which now stands at a gargantuan $18 trillion. And this status as an immense debtor nation could actually eventually trigger a flight from the dollar as the reserve currency to the currency of a creditor nation, such as the Chinese renminbi. Thus, Americans should learn from the calamity of Greek financial irresponsibility by curing their own in advance – by substantially cutting all government spending across-the-board (both defense and domestic spending) – or face eventual financial cataclysm.