The economic collapse of Greece and the impending economic collapses of Portugal, Italy, and Spain on the Mediterreanean perimeter of the Eurozone are predictable consequences for a monetary union without any centralized fiscal authority inhabited by countries that aggressively pursue social market economic philosophies. Many American investors recognize this inevitability and identify the policies of the Obama administration with those of the PIGS. Many of them are now running for the supposed safety of Treasury notes, though as they will surely discover, U.S. Treasury notes are as vulnerable to default as any other once a structural economic crisis becomes sufficiently severe.
The Grand Vision of a United Europe following the end of World War II was predicated on the notion that Europeans would sacrifice national sovereignty in order to avoid continuing internecine warfare that had wiped out millions of their populations and devastated their economies over centuries of conflict. The reality of unification was a cautious integration of highly nationalistic countries, each desirous of securing economic benefits from the others. This worked well for the original six members as the theory of comparative advantage of international trade worked its wonders, while wealth destructive redistribution remained severely constrained by the rule of unanimity.
When the euro zone was first established in 1999, the original members joined for significantly different reasons. Germany, Austria, Belgium, Luxembourg, and the Netherlands recognized the importance of fiscal stability as enshrined in the founding agreement. Finland, Ireland, Italy, Portugal and Spain had other ideas, namely that they would cook their books to gain entry and then make use of German-induced confidence in the currency to run large deficits financed at low rates of interest. Later entrants, Cyprus, Greece, Malta, Slovakia and Slovenia, no doubt were attracted by this perceived opportunity to exploit the euro. The current financial crisis in the euro zone inevitably followed.
As I have indicated in column after column of this weblog, bailouts are no solution for such structurally-based financial crises. Bailouts pour gasoline onto the flames. The only true solution is to allow the losers to fail, in this case, to eject from the euro zone those countries that do not restore balanced budgets within 2 years thus signaling to all members that they must adjust their political economies to a survival mode or confront the break-down of the euro zone.
The survival mode implies balanced budgets, much smaller governments, and a shift towards laissez-faire capitalism and away from socialism and state capitalism. So far only Ireland has recognized the importance of this message. The PIGS surely will not do so, given the willingness of the euro zone to bail out their bad behavior. Ultimately, of course, if the bail-out philosophy remains, the rot will widen until the euro zone collapses.
President Obama would do well to learn the true lesson from this debacle and to return U.S. economic policy towards fiscal rectitude, small governmment and laissez-faire capitalism. Tough medicine for a progressive socialist. But President Obama swore an oath of office, to the best of his ability, preserve, protect and defend the Constitution of the United States of America. Now is the time for him to deliver on that oath.