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Should Germany and the EU bail out Greece? It poses serious questions.
The bailout of Greece would create a massive moral hazard problem. It would signal to the rest of the eurozone that it is OK to run up huge debts because it will be bailed out in the end. Worse, a Greek bailout would likely encourage more deficit spending. It would be like going into a five star restaurant after being told that somebody else will pick up the tab. Under such conditions only a fool would not order caviar followed by lobster and washed down with Dom Perignon.
The European political establishment has too much riding on the euro, however. To the European elite, the eurozone is about much more than economic efficiency. The euro is a pillar of an ever closer political and economic union. That is why the eurozone can only be allowed to expand, but it cannot be allowed to shrink. And that is why — unless the usually docile German taxpayers revolt — Greece will be bailed out in the end.
But, what is to be done about moral hazard?
“I am convinced that any eurozone problem will be in the future interpreted as a consequence of the lack of harmonization … and that will lead to another wave of a creeping harmonization,” wrote Czech President Vaclav Klaus in 2004.
The sage of Prague was right. All indications are that in return for a bailout, the Greeks will be forced to jettison much of their fiscal autonomy and adopt a reform package penned in Frankfurt and Brussels.
If history is any guide, the Greek crisis — and solutions for it — will then be used to increase regulation of the fiscal policies of the eurozone members. The European bureaucrats, after all, have always been keen to centralize more power in their hands. The beauty of a decentralized political system is that it allows its component parts to chart their own course. Some countries succeed and some fail — providing the rest with valuable lessons about accomplishing the former and avoiding the latter.
Centralization of power at the European level is a good idea only if one assumes that the eurocrats will get policies right all of the time — a very unlikely scenario. If they get policies wrong, the whole of Europe — not just Greece — will suffer.
Marian Tupy is a policy analyst with the Cato Institute’s Center for Global Liberty and Prosperity specializing in the study of the political economy of Europe and sub-Saharan Africa.