Greece and some other euro-area economies face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.
We disagree, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.
On balance, debt restructuring plus “internal” or “fiscal” devaluation — difficult as it may be — looks preferable. Explicit wage cuts, and the recession needed to induce them, don’t have to carry the whole burden of cost adjustment. A combination of increased value-added tax and lower payroll tax (Greece could easily do both) mimics a currency devaluation by raising the price of imports relative to the price of exports, lowering real wage costs by stealth. They should be part of the mix.
Inside the system, the peripheral countries have learned a harsh lesson: They must hold growth in wages to the euro area’s rate of inflation plus any increase in national productivity. In countries such as Greece, this demands a new approach to wage bargaining by employers and unions. Overall, though, it should be no more difficult than managing a floating currency. And on this path the reward for success is greater: lower inflation rates and, with luck, faster economic growth.
Notice what’s missing from this article?
No discussion of how Greece wound up with all this debt in the first place.
A national government only winds up in debt when it promises to spend money it does not have and refuses to acquire through taxation. It therefore chooses to borrow, which implicitly (for anyone but a psychotic entity) is a temporary statement of intent to both spend more now and then either spend less or tax more later.
The underlying problem is that this statement of intent was a lie. The government never intended to actually spend less and/or tax more later on. It simply intended to buy votes with a fraudulent promise to pay later on. It never intended to actually cover the debt.
Yet Bloomberg’s editorial desk never points this out, nor do they point out the mathematically-inevitable outcome of these decisions. Debt may never grow faster than output on a sustainable basis. Not for you as a person, not for a company, and not for a nation.
The correct solution to such a problem as Greece has is to refuse to pay. Period. Default.
On all of it.
This, of course, will immediately cut off all non-tax-revenue funds from the government. It will not be able to borrow at any commercially-reasonable rate of interest for quite some time. Perhaps a very, very long time.
This is good, not bad.
It will force fiscal prudence, not “austerity.”
Prudence is quite-simply defined — a government must have an honest conversation with the people it governs, and come to a decision on the amount of money that the people are willing to pay in taxes. From these funds the government provides services, and only from those funds.
That’s how simple it is, and yet this is never, ever mentioned by Bloomberg — or The Journal for that matter, along with the other members of the “mainstream media”, even though it is both the obvious answer and the only one that is mathematically defensible.
Because if such a premise gains currency — gains acceptance among the people — and they wise up, then the game here, in America, along with the rest of the western world, is immediately over.
Instead of ever-increasing leverage capital formation will come from economic surplus. Instead of ponzi schemes government will exist on its ability to convince the public to pay taxes, allocating that revenue to services, and its reach will end there — for good or bad.
The power to commit fraud — by banks, by governments, by hucksters of all stripes — will be severely curtailed. And with the curtain of obfuscation torn down the ponzi schemes of bogus asset valuations, intentional false claims of “solvency” and political promises that cannot possibly be kept as they amount to several times the gross output of the entire nation — will be forced to end.