Discovering a Growing Disapproval for Greek Bailouts

Hey, what’s this? Greece can’t pay its bills?!

Yes, it’s true, Dear Reader, the Greek finance ministry disclosed once again yesterday that its deficit will be “higher than expected.”

“The deficit this year will likely be 8.5 percent of its gross domestic product,” the Associated Press reports, “higher than the 7.8 percent previously anticipated, and blamed a deeper-than-expected recession for the failure. The Greek economy is projected to shrink 5.5 percent this year.

“The revelation,” the AP continues, “that Greece is finding it increasingly difficult to reduce its borrowings in spite of all its austerity measures has raised fears that international creditors will effectively pull the plug.”

The AP’s matter-of-fact conclusion echoes the one matter-of-fact observation your editors have been issuing for nearly two years: Bankrupt entities tend to go bankrupt.

Greece will default…eventually.

“The bailout funds — no matter how large they grow — will merely slow the march toward inevitability,” we observed last Friday. “The destination is certain; the timetable is variable.”

Your editor is here in the Old World conducting a week-long “Farewell Euro Tour.” From the Netherlands to Switzerland to Italy, he has been querying folks on the “straats,” “strasses” and “vias” about the Greek bailout and about the euro’s chances for survival.

Generally speaking, support for “saving Greece” is tepid at best. And this grudging support seems to be waning with each passing day.

Although most folks expressed some vague notion that rescuing Greece was worth trying because it was probably in the public good, most folks also expressed a strong preference for their old national currencies. The Dutch, in particular, preferred their guilder. But the Germans preferred their marks and the French their francs too. Even the Italians preferred their liras.

In other words, the EU’s bailout schemes seemed to have captured the minds of Europe (like a hostage), but very few hearts. Resignation is the dominant emotion, not resolve.

Resignation to an intellectual argument may be capable of winning a few battles with the heart, but it rarely wins the war. Sooner or later, probably sooner, the widespread — and heartfelt — contempt for the Greek bailouts will spark a rebellion against the EU’s bailouts schemes.

Ironically, the emotion side of this debate may also possess the intellectual high ground. The EU and its European Financial Stability Facility (EFSF) consider it intelligent to rescue Greece, and also to begin building a war chest to rescue Portugal, Spain, Ireland and Italy…if need be.

In their hearts, most Europeans seem to recoil at the idea of funneling ever-larger piles of euros down to their southern neighbors. The bailouts just don’t feel fair. Fair would be to let the bankrupt nations go bankrupt. And bankruptcy might also be desirable. The process is not painless, but it is proven…and it is very effective… Which brings us to Slovakia, the poor, little central European nation that is tugging at the heartstrings of rich neighbors.

It is saying, “No! No more bailouts!”

Even though the German Bundestag approved a €250bn increase in the EFSF (to a total of €440bn) last week, all 17 eurozone members must approve the increase. The Dutch and Maltese governments are expected to give their approval soon, which would make Slovakia the sole dissenting voice.

Slovakia, which pursued an arduous path to eurozone membership, and finally joined the currency union two years ago, is not keen to dilute the membership credentials of the club it worked so hard to join.

“The rescue fund is simply buying time in an incredibly costly way, but it’s not solving the problems,” complains Richard Sulik, Slovakia’s Freedom and Solidarity party leader.

Sulik’s reasoning seems sound…and heartfelt. The bailout funds may delay whatever fate awaits Greece and the euro, but they won’t prevent it.

The EU’s answer to every new sign of financial distress in the PIIGS nation is “more euros.” Since May 2010, the Greeks have received about $150 billion in bailout funds from other eurozone countries and the International Monetary Fund. When it became undeniably clear last spring that $150 billion would not be enough, the EU leaders arranged another $150 billion package. Even though the details of this second bailout are not yet final, the EU cooked up an even larger bailout facility.

Should anyone be surprised that some Europeans are starting to say, “Enough!”?

Eric Fry
for The Daily Reckoning