The Greek deal reached in the early hours of last Monday and ratified by the Greek parliament Wednesday drew a sigh of relief from investors. Unfortunately, that reaction was not simply premature. It's completely misguided.
Greece would be far better off leaving the eurozone, and the common currency would be strengthened by its departure. Meanwhile, another Greek bailout will encourage other irresponsible governments, such as Portugal, Spain, and Italy.
The deal provides Greece with 85 billion euros ($95 billion) in new loans in return for tax code reform, an overhaul of the state pension system, safeguards for the government's independent statistics agency, and modest budget cuts. It also reiterates a call for 50 billion euros' ($56 billion) worth of privatization of state-controlled assets, the proceeds of which will be kept in a trust fund to satisfy Greece's creditors.
But – as with previous bailouts, which have now totaled over $250 billion – implementation of austerity measures requires the cooperation of the Greek government, something Syriza has proven incapable of thus far.
An Empire of Debt
Greece now has 320 billion euros ($360 billion) of debt, about twice its GDP. It has been running large budget deficits ever since it entered the EU in 1981, in spite of its massive access to EU poverty and agriculture funds.
The massive subsidies and government overspending raised Greece's GDP per capita to a peak of $32,000 in 2008, more than several Western European countries that were very clearly more productive.
When you compare Greece to its neighbors Bulgaria, Romania, and Macedonia, it's no more productive or capitalist and just as corrupt – hence it should be no richer. That sets a target equilibrium Greek GDP per capita in the $10,000 to $15,000 range. At that level, Greece would survive without massive handouts, and might possibly be able to service its debt.
The attempt since 2010 to use austerity to halve the living standards of the Greek people was always very unlikely to succeed. It also allowed the “austerity” cuts in public spending and living standards to be blamed on EU bureaucrats rather than the impersonal forces of the market. Thus it was no surprise when the hard left party Syriza won elections in January.
