The Wall Street Journal

  • FEBRUARY 14, 2012

What happens to countries that choose economic decline.

Rioters torched shops and offices, with banks and foreign businesses the main targets. Pensioners wearing gas masks joined a blockade of Parliament and squared off against some 4,000 police officers. The city’s best-known cinema was burned to the ground, along with nine other national-heritage sites.

This was Athens on Sunday night as the Greek Parliament voted for austerity measures that are their only ticket to a €130 billion bailout. Don’t think these scenes can’t—or won’t—be repeated in other Western capitals.

When it comes to naming the bad guys in this Greek tragedy, the net can be cast very widely. Both leading political parties acquitted themselves dishonorably, one by lying about the country’s fiscal position, the second by failing to do much about it. The country’s government unions have resisted every serious reform and paralyzed the economy with strikes. An anarchist movement with an appetite for destruction rarely misses an opportunity to feast on mass discontent.

Greeks themselves seem unable to choose between taking another bailout and adopting austerity, or abandoning the euro and accepting the consequences of default. It’s so much more convenient to blame foreign creditors (“thieves”) for demanding repayment of loans that funded the lavish welfare benefits Greeks could never have afforded on their own. And when that fails, blame the Germans for being such demanding paymasters.

To top it off, the technocrats in Brussels and at the IMF have misdiagnosed the crisis from the beginning. First, they thought Athens had a liquidity problem that could be eased by large infusions of loans, rather than a fundamental solvency problem. Second, they believed that what Athens needed most was a balanced budget and a smaller debt load, to be solved arithmetically with less spending and higher taxes. But Greece’s real problem is the lack of economic growth, itself a product of policies that discourage private enterprise. That’s why Greece ranks 100th on the World Bank’s most recent rankings of “ease of doing business”—right behind Yemen.

In other words, the fires in Athens are the result of the combustible mix of a desiccated welfare state and the burning embers of Keynes’s cigarette. Don’t expect those fires to be put out by this latest round of austerity. In theory, Athens has agreed to carve €3.3 billion out of this year’s budget (including €300 million out of pensions), slash the minimum wage by 22%, and eliminate 150,000 government jobs by 2015.

These are necessary measures for a government sliding toward a debt-to-GDP ratio of 160%. But they do nothing to address the growth side of Greece’s problem. They will also create an intolerable political problem for Greece’s government as state workers are laid off into a shrinking economy. Expect a fresh exodus of Greek labor, along with increasingly powerless (and short-lived) Greek governments.

With Sunday’s vote, Greece has dodged a disorderly default, at least for the time being, and Greece’s private creditors can consider themselves lucky for taking only a 50% haircut under the latest proposed restructuring deal, when they might have had their heads shaved. But the crisis will not end until Greeks understand that they must live off what they produce, and adopt the policies that enable them to produce more. The larger question is whether the rest of Europe and America will learn from Greece’s chaos before they experience the same fate.


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