Right time to send a strong signal

Supporters of the Greek Communist Party shouting slogans as they attend a  meeting  in front of the parliament building in Athens yesterday. Greece used “creative ambiguity” to win a loan lifeline from its international partners, Finance Minister Yanis Varoufakis said, provoking anger in Germany’s parliament which approved the deal yesterday. Varoufakis, a hero of the anti-austerity left who has raised hackles among his more orthodox eurozone peers, said Greece had drawn up an economic reform plan that was “full of ambiguities” to fulfil a condition of the Eurogroup’s four-month lifeline.

By William F Shughart II/TNSInstead of extending Greece’s credit line for another four months, European officials should have cut Greece off from the financial lifeline it’s been abusing.It would have sent the right message to other spendthrift governments, such as Italy, Portugal and Spain, and would have forced Greece to reform its economy and get its finances in order. Now all the EU gets is another promise.In hindsight, Greece never should have been admitted to the 28-member European Union (EU) or to its 19-member common currency area, the “eurozone”.Joining the eurozone became possible in 2001 only after some creative accounting in Athens, overseen by America’s Goldman Sachs, the giant global investment banking firm.EU officials in Brussels did their part as well, ignoring the fact that Greece didn’t meet the “convergence criteria” for membership, including such basics as maintaining sound public finances and limiting government borrowing to avoid excessive budget deficits and unsustainable national debts.As a result of profligate public spending, rampant government corruption and the unwillingness of Greeks to pay taxes sufficient to finance the government, Greece’s economy hit a brick wall in 2011.That man-made disaster was met by a loan of 240bn euros - about $273bn - from the European Central Bank (ECB) in return for Greece’s promise to restructure its public debt and come closer to meeting the convergence criteria.Now this loan is due and Greece is in no better financial shape than in 2011. Faced with insolvency, Greece’s newly elected left-wing Prime Minister Alexis Tsipras has reached an agreement with the ECB to extend the loan for another four months. But there’s a price: Greece will have to make good on its promise to reduce government spending and reform its economy.The austerity measures that won Greece the 2011 ECB loan - a combination of budget cuts and tax increases - already have triggered widespread public demonstrations against what Greeks perceive as ECB bullying.With the prospect of further belt-tightening looming, Greeks have taken to the streets again. What they’re telling the rest of Europe, in effect, is, “We like our generous public sector, and you’re not going to force us to pay for it!”Until now, it’s mostly been German taxpayers, not Greeks, who have shouldered the burden, a consequence of Europe’s monetary union. Extending the loan doesn’t change things.The best way to change things would have been by expelling Greece from the eurozone.The short-run economic consequences for ordinary Greeks admittedly would be severe - probably harsher than any new conditions the ECB might impose for another bailout request in four months’ time.Unemployment rates, already high, would soar. Businesses would fail. Assuming the country would return to the drachma, its long-time national currency, Greece might experience a period of inflation, as foreign exchange markets downgrade the currency and the Greek central bank attempts to counter this by expanding the money supply - a sure formula for inflation.Still, just as the hangman’s noose focuses the condemned prisoner’s mind, Greece’s expulsion from the Eurozone would have sent a strong signal that the EU’s convergence criteria actually mean what they say.Mario Draghi, president of the ECB, committed that institution back in July 2012 to do “whatever it takes to preserve the euro”. That sentiment still is widely held and probably explains the rationale for the bailout extension.The key questions now are whether Greeks want it enough to pay the piper and whether Greece’s socialist prime minister has the courage to forgo his campaign promises and become a free-market reformer.♦ William F Shughart II is the research director of the Independent Institute, (www.independent.org), a classical libertarian think-tank and the J Fish Smith Professor in Public Choice at Utah State University’s Huntsman School of Business. Readers may write him at 100 Swan Way, Oakland, CA. 94621.