Greece is now on the edge of bankruptcy, yet the newly elected leaders are not willing to admit that the debt crisis is rooted in the country’s generous welfare system. Instead, they have tried to shift the public’s anger toward foreign borrowers, such as Germany.
It is unbelievable that European leaders have a high degree of tolerance with Greece’s irresponsibility dealing with regard to its own financial situation. The radical left-wing Prime Minister Alexis Tsipras has promised to the public that his government will end the austerity plan, expand the welfare system and rehire employees in the public sectors who were fired due to the austerity plan after recession. Those promises are commonly used schemes to court voters, but they will never be fulfilled.
Despite the European finance ministers’ preparing some complicated conditions to negotiate with the Greeks, this debt crisis boils down to a few simple questions. First, will the EU countries continue to bail out Greece without holding tougher terms of reform and pressing Greece’s government to keep the austerity plan? Secondly, in the worst scenario, will EU leaders be ready for a euro zone without Greece?
The first question boils down to how to spend whose money, and on whom do you spend it on. Milton Friedman once divided spending into four classes: 1. You spend your own money on yourself. In this case, you are motivated by needs to spend and constraint by your budget, thus you always want the best price and value for your spending. 2. You spend your own money on other people. You still want a bargain but certainly are less interested in caring for the recipients. 3. You spend other people’s money on yourself. Prices do not matter anymore. You can spend as much as you want without thinking about the cost. This is what a mistress or gold digger does, so does the government. 4. You spend other people’s money on other people. In this case, who cares?
Greece’s problem would obviously match options 3 and 4 above. On one hand, the welfare system continues to run relying on high taxation. On the other hand, Greeks are borrowing billions of dollars mainly from Germany and France, the wealthiest countries in Europe, to prevent their chain of cash flow from breaking temporarily. Greeks are no longer ashamed of losing credibility to their borrowers. They have defaulted interest payments of government bonds many times and demanded that the EU forgive their current amount of debts and let them have a fresh start.
What the Greeks want in large part is to restructure its debt. The European Central Bank currently holds 3.2 billion euros of Greece’s government bonds that will mature in July. That suggests that Greece has to pay interest payments until then and pay back the face value of the bonds. But the Greeks intend to make their bonds “perpetual” — bonds without mature days and need to be interest infinitely. These perpetual bonds are actually one form of Ponzi scheme: You save some money in the bank and receive interest rates each year, yet you never get your money back.
This is apparently unrealistic. As Germany’s finance minister Wolfgang Schauble said, “The problem is that Greece has lived beyond its means for a long time and that nobody wants to give Greece money any more without guarantees,” Indeed, without the EU’s rescue plan, Greece has little means to finance its debt. With a stagnant economy, raising taxes or issuing bonds does not work, given that Moody’s Investors Service has rated Greece’s bonds as “Caa1,” commonly called “trash bonds.”
Some EU leaders still have hope that reaching a deal with Greece will bring the radical left to the mainstream politics and have an amplified effect that the populist dogma will not spread to other EU countries similar to Greece. But these hopes might be fragile. Once the Greeks get what they want, other countries might follow the same strategy to force Germany and France to reconcile, potentially adding more risks to the euro zone.
Put it simply, the rule of thumb is: Never mess with a welcher.
