- - Sunday, July 5, 2015

ANALYSIS/OPINION:

Almost every option facing debt-drenched Greece is bad, but there is only one that will end this Greek tragedy for good. Let Greece go bankrupt. Then let this once-rich nation, hit the restart button to rebuild its economy.

What I’m suggesting for Greece is what might be called the Detroit option. Put Greece under receivership and let these new authorities figure out how to manage the debt and decide who will take a haircut and how big. Pensioners, bondholders, welfare recipients, government workers, the International Monetary Fund, all will have to settle for less — maybe a lot less. It’s tough love, but it’s the only way out. More bailouts and debt extensions will only delay the crash of the socialist Greek economy.

I can already hear the heart palpitations of the Wall Street investors. This option puts them in the fetal position with the thumb in the mouth. They worry about the entire world economy collapsing as creditors flee the sovereign debt of one fiscally bloated nation after another — Spain, Argentina, Venezuela, Puerto Rico, Portugal. All of them have the same defects: obese welfare states, leaky pension systems and tumbling tax collections.

But every option is worse. For six years the brainiacs at the International Monetary Fund and the European Union have devised one bailout and debt restructuring scheme after another. None of them have worked. They have only saddled the Greek citizens with even more long-term debt that can’t be paid back. Greece is now sitting on $350 billion of debt. It is unpayable and the international monetary experts are deluding themselves into believing that by some magic stroke, this nation of less than 11 million citizens will some time in the future come up with the funds to repay it.

The left-leaning Greek government is making things worse. One plan would raise the value-added tax and business taxes to come up with more revenues. But Greece is already overtaxed, and taxing the few businesses that are still functioning is only going to ensure their eventual demise, too. Economist Alan Reynolds of the Cato Institute has found that the cascade of taxes in Greece can reach so high that the rates approach 100 percent. And so very few work. Meanwhile, the Greek citizens have come to the conclusion that fat pensions and cradle-to-grave welfare benefits are a human right that can never be taken away. Maybe the politicians never will. But a bankruptcy court could and probably would.

All of the conventional EU and IMF solutions sidestep the root cause of the Greek tragicomedy. The Greek citizens are simply living way, way beyond their means. This is a nation with an average retirement age of 60. This is a nation that has one in four adults unemployed and half of its young people out of work. With such countrywide levels of idleness, who is working to pay for these super-extravagent benefits? Are the hard-working German citizens going to pay more taxes to provide lavish benefits to Greek retirees? Probably not, and they are fools if they decide to do so.

A recent Investors Business Daily editorial put it well: “It is a near certainty that Greece will continue to drown in debt until this death spiral of rising government obligations paid for by a shrinking private sector workforce reverses course.”

This requires a technical default on Greece’s debt. (The nation is already in default on more than $1 billion in IMF loans.) This will force a debt restructuring. Creditors may get 50 cents on the dollar owed, depending on how bleak the finances really are in Athens. Welfare benefits will have to be slashed. Pensions for retirees will be cut based on the new reality of Greece’s finances. This may seem “unfair,” but how is it fair to require young Greek citizens to bear exorbitant taxes to pay for the sins of their fathers and grandfathers?

When Detroit filed for bankruptcy, it allowed the Motor City to, in effect, start over economically. The city is financially cut off from much borrowing. Government workers have been laid off. Benefits have finally been trimmed. And guess what? Detroit is making a comeback. Real estate values are rising. Construction is beginning again. In a decade, Detroit could be a financially sound and desirable place to live and do business.

Will this cause a global financial panic? Not if it is carried off in an orderly and open fashion. One implication of this solution is that investors may start to view sovereign debt as risky, not risk-free. They will charge nations — especially those that have massive unfunded liabilities — higher interest rates. Making it harder for bloated governments to borrow would be a positive development. More money would flow to private-sector borrowing and less to governments.

Another criticism is the charge of “austerity.” But there has been no austerity in Greece. This is a nation that in 2013 was spending up to 59 percent of its gross domestic product (GDP) on government benefits and programs. Even today the government accounts for half of all spending. How is that austerity? The problem is as the private economy shrinks, the government’s role keeps expanding. Greece’s debt was 120 percent of GDP a decade ago, and now its 175 percent. This is the opposite of austerity. It is a government-sponsored orgy.

Most importantly, Greek bankruptcy will serve as a teachable moment to the scores of overtaxed and over-debt-burdened nations of the world, that the jig is up on unaffordable government promises. Investors will also learn that governments that spend and tax their way to financial oblivion are not risk-free. This would also be a good time to shut down the feckless IMF and World Bank. These institutions haven’t averted financial crises. They have enabled them through their lending policies that are the equivalent of giving crack cocaine to drug addicts. That story never ends well. Greece has taught the rest of the world that socialism is dead. The tragedy is so few world leaders are learning that.

Stephen Moore is a Fox News contributor. His most recent book, with Arthur Laffer, Travis Brown and Rex Sinquefield, is “An Inquiry into the Nature and Causes of the Wealth of States” (Wily, 2014).

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