Last week I wrote about why the latest attempt to shore up the Euro and address Greece's financial problems seems unlikely to work. The markets rallied big time as a result of the deal, but now analysts are increasingly worrying that this is merely another band-aid that will only allow Europe's real wound to fester.
Liam Halligan makes an important point in the Telegraph, that the continued bailout of the Greeks, with fig leaf promises of “austerity” measures that are never actually implemented, creates a problem beyond what it means for Greece's balance sheets. Why should other governments, from Spain to Portugal to Ireland, bother pushing fiscal responsibility on unhappy citizens when the EU will just come to the rescue of overly-generous benefit systems that remain unchanged?
This is the same problem that pervades any bailout, whether its U.S. auto companies saddled with crazy union health care systems or underwater home-owners. Government has to take from responsible taxpayers and companies to pay off those that have, whether by bad luck or bad choices, gotten themselves into trouble.
Of course, we sympathize with people who through no fault of their own end up in tough situations, but the core problem is that it is hard, if not impossible, for government to protect those that we might agree could simply use a break, while not opening to door to those looking to abuse the system.
We know how this works in our own lives. If a friend or family member gets ill, loses a job, or has some other problem that they are struggling to address, we are happy to lend a hand to help that person get back on their feet. But you know that giving a loan to an alcoholic uncle or your neighbor's latest get-rich-quick-scheme is worse that wasteful, it's enabling bad behavior. Government has little to no ability to differentiate between such situations, and the political process makes efforts to help ripe for exploitation.
Governments would better serve citizens by embracing a little humility. The Obama Administration can't really control housing prices and to the extent that it tries to, it will create far more problems for home owners, the credit industry, and potential buyers than it solves. Well-intentioned EU bailouts also won't solve Greek's core budget problems—or at least not without incredibly high costs for other countries. The EU leaders may be frustrated that the markets are increasingly skeptical of their latest solutions. But there is wisdom in those markets who recognize that propping up an inherently flawed system can't be a victory for long—and is a long-term losing strategy.