The mainstream media would have us believe two myths about the Greek financial crisis: one, that the inability of the Greek government to meet its debt payments is a threat to the Euro and perhaps to the European Union itself; and, two, that Greek “austerity” would be a disaster for the Greek people.
The mainstream media takes it for granted that the proper “solution” is for some entity to bail out the Greeks—perhaps the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF), or some combination. Furthermore, the assumption is that when markets go up it is due to speculation that a bailout is imminent and that when markets go down it is due to some roadblock to an expected bailout. When the governments and their agencies agree upon the proper form of new loans, and/or loan guarantees, along with a token reduction in Greek spending, all will be well. In other words, the mainstream media portrays this financial crisis as one that can only be resolved by more government intervention.
First lets look at the so-called threat to the Euro, which is equated as a threat to the EU itself. Greece uses the Euro as its legal monetary unit. When Greece joined the EuroZone (not all EU members are members of the EuroZone, meaning they have not yet exchanged their national currencies for Euros), the Greek drachma was exchanged for Euros. Now all transactions in Greece are denominated in Euros. Greek citizens buy and sell using Euros. The Greek government spends Euros and, when it runs a budget deficit, it borrows Euros from private banks…the ECB being restricted by treaty from buying sovereign debt. The Greek crisis is simply that the Greek government is spending more Euros than it receives in tax payments, and private banks are balking at lending it more. Since the Greeks no longer have a national currency, they cannot debase it and pay off their creditors with cheapened drachmas. So, the Greek government is left with the choice of raising taxes, cutting spending, or some combination of the two that will satisfy its creditors. Now, would someone please tell me why and in what form this Greek financial crisis, serious as it is to the Greeks themselves, constitutes a threat to the Euro?
What Do Zimbabwe, Panama, and California Have in Common?
This past weekend I was a special commentator on Michael McKay’s excellent weekly radio show “Radio Free Market”. Mr. McKay interviewed Mr. Doug French, president of the Ludwig von Mises Institute, a free market think tank in Auburn, Alabama. Mr. French described the mindset and policies that brought hyperinflation and economic chaos to Zimbabwe. The central bank of Zimbabwe inflated the “Zim” out of existence. But the economy is functioning with a new currency. Can you guess what it is? The dollar! Now, is there anything that the Marxist government of Robert Mugabe’s Zimbabwe can possibly do to cause a crisis in the dollar? No! Likewise, is there any way that the Marxist government of Zimbabwe can destabilize the U.S. because its citizens voluntarily use the dollar? Again, no!
Here’s another example--Panama is a dollarized economy, meaning that it has exchanged its national currency for the dollar. If you travel to Panama, it is not necessary for you to exchange dollars for a local currency. All transactions are in U.S. dollars. Again, is there anything that the Panamanian government can do that can threaten the stability of the dollar? No. The Panamanians have linked their monetary system to that of the United States, just as the Greeks have linked their monetary system to that of the EU.
One last example, and one that is closer to home. The state government of California has run up tremendous budget deficits and may not be able to pay back its loans, all denominated in dollars, of course. Would a California default threaten the stability of the dollar or the stability of the United States? Again, no. Banks may fail. Private creditors may lose. But the dollar and the stability of the U.S. would be unaffected by this disaster. Remember, the dollar and the Euro are merely mediums of exchange. Others may choose, voluntarily, to use dollars or Euros. The countries using dollars and Euros may undergo internal crises that truly do disrupt their citizens’ lives, but none of this threatens the currency…as long as central banks refrain from printing money in order to bail out the profligate governments. In other words, a fiscal crisis need not lead to a monetary crisis.
An “Austere” Government Would Speed Recovery
Next we turn to the commonly held assumption that the Greeks would be harmed by government “austerity”. The Greek government might not be able to spend as much as in the past, whether on pensions, healthcare, defense, whatever. Again, the mainstream media treats this as a complete disaster. The New York Times runs daily articles decrying that the Greeks will have to live within their means. Now, I am certain that SOME Greeks will suffer should the Greek government reduce its spending. All those who believed that their government could pay generous retirement benefits and who planned their lives accordingly will face hard, cold reality. But, let us not forget that every penny spent by government is taken from someone else by compulsion and coercion.
The best explanation of the predatory impact of government spending is to be found in Murray N. Rothbard’s America’s Great Depression. Whereas the Keynesians view government spending as an addition to gross domestic product, Rothbard explains that the more government spends the worse the economy gets. If we think of the REAL economy as the private economy, then it is clear that every dollar or Euro spent by government must come at the expense of the private REAL economy. And not only must government spending be subtracted from private purchasing power, but all the regulatory burdens of government add even more to the negative impact of government upon civil society.
Since Keynesians add government spending to consumer spending to arrive at gross domestic product, they perpetuate the myth that government spending is good for the economy. But Rothbardian Austrian economists harbor no such illusions. We subtract government spending from private purchasing power and recognize that this spending is only part of government’s predatory impact upon the people. Every line of government regulation reduces the efficiency of the private sector to propel the nation forward, for it must prevent actions that a free people would value more highly or compel them to do something that they value much less.
How much government action is interventionist and, thusly, harmful? George Reisman has studied government action and claims that no less than eighty percent of government action as interventionist! So, reducing government spending, whether voluntarily or at the behest of creditors, is a boon for the private, real society. Wherever government cuts back, that area becomes freer, reducing its burden on society.
The Miraculous Recoveries of Germany and Japan
Many economists have chronicled the almost miraculous economic recoveries of Germany and Japan following World War II. Most have rightly focused on savings, hard work, freer trade, reduced military spending, capital loans, etc. But one area that is not appreciated is that the old order was washed away. People were truly free from the accumulated decades of burdensome government. Both Germany and Japan marveled at the productive capacity of America and adopted the best of our practices. And both countries could adopt these practices with little cultural and political resistance, because the old political and cultural order had been discredited by war.
As difficult as it may be for the Greeks to give up their cherished welfare state, that socialist/Keynesian predatory state has been discredited. The Greeks need capitalism and freedom, not socialism and the bureaucratic welfare state. Rather than being the poster boy of another failed state, by scrapping its welfare and regulatory burdens Greece could become an example of how to transition from a half-century of socialist predation to a free, prosperous, and successful nation. Greece does not need more debt from a bailout that will perpetuate the predatory welfare state as a burden upon the people.