Markets responded favorably to the news that Greece had passed a package of austerity measures in order to secure bailout money. But it also seems clear that the Greek crisis is far from over. Greek debt is so high, and its economy so dysfunctional, that neither bailouts nor growth can save this latest sick man of Europe. As Irwin M. Stelzer recently wrote in the “Weekly Standard”, "All of these bailouts, and those to come, are premised on the notion that the troubled countries are having a liquidity problem, and a bit of cash will enable them to get back on their feet and repay their debts in full and on time. It is now clear that these countries are not merely illiquid but are insolvent, and that they will one way or another have to renege on their debts, at least in part."
Since 2010, European political and financial leaders have done all that they can to prevent and the disintegration of the eurozone. But the truth is that Greece doesn’t have the money to pay its creditors, and can’t renegotiate its debt or devalue its currency because it wears an E.U. straightjacket. Either Greece will continue to sink into insolvency and depression, or it will reject its German and French stewards and chart its own path. Since downtown Athen has turned into a warzone, I think the chances of the latter outcome are greater than the former. What happens then is anyone’s guess.
The dominant political fact of our time is that governments have made promises they cannot keep. Whether it is Greece, or the U.K., or the U.S., bills are coming due that the authorities cannot pay. The rules of accounting pay no attention to ideology or partisan affiliation. Greece’s austerity measures were imposed by a Socialist government. Democratic governors in California, Illinois, New York, and Connecticut struggle to balance their books, and find that tax increases are no panacea. And no matter how much our president would like to spend money on “investments” in green jobs, alternative energies, and high-speed rail, the implacable truth of America’s looming insolvency forces him to accept cuts in government spending.
The fiscal breakdown of the welfare state, combined with the powerlessness of Keynesian solutions to revive the economy, is the largest mugging by reality in a long, long time. Call it the crime of the twenty-first century. And be prepared for unexpected and unfashionable ideas and forces to shape the future.