Why the European Bailouts?
By Arnold Kling
Democracy could ‘collapse’ in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned.
That is actually a better story than the more common one, which is that the bailout is needed to “save the Euro.”
The Euro is a medium of exchange. It is very useful, as I was reminded on our recent trip to Europe. But I fail to see the connection between the bailouts and the common currency.
The Club Med countries have large fiscal imbalances. I think of that as an internal political problem. Whether or not the countries use the Euro as a medium of exchange is not the issue. Perhaps at this point Greece wishes that its debt were denominated in a currency that it could print. But that is unlikely to be the case in any event. Suppose that Greece were using the drachma as a medium of exchange. Would foreign lenders have been lending to Greece in drachmas or in Euros? My bet is with the latter.
The Club Med countries have wages that are high relative to competitive levels. This is a problem of sorts, but I think of it as mostly unrelated to the debt crisis. Using the Euro as a medium of exchange may make it more difficult to adjust relative wages. However, I do not see that as the primary issue. I see the primary issue as fiscal imbalances.
My view of the bailouts is that they are primarily to save French and German banks. All the talk about “saving the Euro” is a smokescreen.
I find it ironic to have an EU official warning about the collapse of democracy. The eurocracy is a very undemocratic organization, chronically in conflict with popular opinion. The bailouts are unpopular, and quite properly so. Any official who claims that that the bailouts should be undertaken in the name of democracy is a poseur.