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For anyone wondering what happens to an institution loaded up on CDSs if the “unthinkable” happens–like a decline in American real estate prices for example–three words should suffice: American Insurance Group (AIG). AIG cost the American taxpayer $182 billion, the largest federal bailout in history.
Thus, the pressure to keep Greece afloat is enormous. But is it the correct path? That depends upon which side of the political divide one chooses to place oneself. The combination of national European leaders, led by France’s Nicolas Sarkozy and Germany’s Angela Merkel, and EU leaders, European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy, apparently believe the concerns of the EU as a whole outweigh the concerns of individual nations themselves. For them, the better path to eventual prosperity is to loan individual nations funds staving off bankruptcy, under the condition that such nations embrace severe austerity programs, which will theoretically reduce national debt levels to manageable proportions over an extended period.
The problem with this approach is two-fold under the best of circumstances. One, as Greece has already demonstrated, missing debt reduction targets precipitates more bailouts, which precipitate greater austerity, which lowers economic output, which makes missing future debt reduction targets more likely. Why the best of circumstances? Because as Greeks and other Europeans have amply demonstrated, severe austerity measures have been met with riots, strikes and other acts of violence, which are, unfortunately, a likely reaction by people long used to the sense of socialist-induced, self-entitlement nurtured in Europe for decades. Second, while bailing out a nation like Greece is relatively cheap, the trillions of dollars needed for bailing out larger EU nations, such as Italy, which may be forced into default if borrowing costs continue to rise, may be impossible amass, as a more detailed analysis here reveals.
The other approach? A partial or total breakup of the European Union, in which many or all of the EU nations return to their sovereign currencies. The currencies would then be devalued to make investing in the such countries more inviting. Doubtlessly, there would be fiscal pain, likely of depression-level severity, but at some point the markets would right themselves.
The potentially multi-trillion dollar question: which is worse: fiscal austerity and debt reduction targets mandated by the EU, or pain self-imposed by sovereign nations coming to grips with individual bankruptcies and re-capitalization? The most honest answer? No one knows for sure.
Yet perhaps the economic argument is secondary to the real one, not just in Europe, but in the United States as well. What the EU represents is the ascent of the kind of top-down, command-and-control bureaucracy that socialism’s champions inevitably produce. Yet what has such centralization of power–and money–produced? Entities that are “too big to fail.” Privatized profits, but socialized losses when those losses threaten not only banking systems and/or nations, but an entire continent as well. Crony capitalists protecting their interests with government’s help, and millions of people who feel entitled to a lifetime of well-being enabled by government, even as that government largesse bears no relationship to productivity and fuels massive amounts of deficit spending.
All of this undermines the fundamental notion of individual liberty. Liberty which is best served when government functions from the local level outward, not the federal or EU level inward. It’s as simple as understanding that it is far easier to get a stop sign installed on a corner in one’s neighborhood when one can call a local alderman–instead of a bureaucrat in Washington, D.C.
One may argue with Prime Minister George Papandreou’s intention of letting the people themselves decide their own destiny as an abrogation of responsibility on the part of the Greek government. But the idea that other Europeans see such an exercise in direct democracy as tantamount to heresy is quite revealing. Apparently Greeks are supposed to take the bailout, like it or not, and remain tethered to a supra-national bureaucracy in which failure must be eliminated, at virtually any cost (currently including bank recapitalizations and a scaled up European rescue fund), lest it become “contagious.”
Yet the possibility of such contagion reveals an uncomfortable truth about such interdependency: the “too big” in too big to fail is getting smaller every day.
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