Why another Greek bailout is a stupid idea

First, the bailouts are not actually making it any more likely that Greece will be able to pay its debts back. Perhaps just the opposite. The bailouts are trying to solve Greece’s debt problem with debt. The talk is that a proposed second EU bailout could total as much as 120 billion euros. Taken together with last year’s 110 billion-euro rescue, the combined bailouts could add up to a remarkable 100% of GDP. With mandated budget cuts, tax hikes and other austerity measures eating into the country’s growth potential, the combination of a stagnant economy and unresolved high debt levels is not going to convince any investor to trust his or her money with the government in Athens.

That’s especially because no one can trust Athens to follow through on its reform pledges. Even if the austerity package passes parliament on Tuesday, is it politically possible to implement it? Will politicians eventually cave to anger on the streets? Can the government even survive in the face of such opposition? There is no way investors can be convinced that the government in Athens will hold up its side of the bargain, and thus no way to convince private investors to have faith in further EU bailouts. In fact, continued EU aid may actually be undercutting Greek reform efforts rather than energizing them. In a very interesting analysis of the Greek political situation in The Wall Street Journal, Takis Michas makes the point that those political forces that gain from resisting EU-mandated austerity programs – public sector unions and opposition parties – have no incentive to join in reform since they believe the EU will continue to bail out Greece under any circumstances to protect its creditors. In other words, as long as the Greeks know the gravy train is coming, they have less reason to accept reform.

So this all leads us to another reason a second Greek bailout is idiotic. If creditors will continue to have doubts about Greece’s ability to reform and pay them back, then the new bailout scheme simply can’t work.