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Five reasons not to support the bailout of Greece

By Sally McNamara and J.D Foster - posted Tuesday, 11 May 2010

Last weekend, the Eurozone members and the International Monetary Fund (IMF) proposed a €110 billion (US$140 billion) rescue package for the struggling Greek economy. In exchange for imposing tough austerity measures - including a three-year public sector pay freeze, an increase in taxes, and a liberalisation of labor laws - Eurozone countries will provide €80 billion in emergency loans over the next three years for Greece, and the IMF will provide the rest.

Three people have already died following increasingly violent demonstrations in Athens, protesting the package of austerity measures to be voted on by the Greek government. German Chancellor Angela Merkel is also facing a public backlash, having agreed to provide the largest European contribution to the Greek bailout - some €22.4 billion (US$29 billion).

With a budget deficit of 13.6 per cent, a debt-to-GDP ratio of 120 per cent, over 10 per cent unemployment, and one of Europe’s weakest and most corrupt economies, the Greek economy is certainly in crisis. A bailout, however, is not the answer to this Greek tragedy. Here are five reasons why.


Reason #1: a bailout will not work

In order for a bailout to be successful, Athens needs to align the national wage structure with its productivity. That means implementing structural reforms, including root-and-branch reform of its labour market, tax system, higher education, and pensions system. They will have to be as far reaching as the reforms implemented by the 1980s Thatcher government in the UK and the Lange government in New Zealand in 1984.

However, in an economy dominated by the trade unions, it remains uncertain whether Prime Minister Georgios Papandreou’s government can effectively implement such reforms, which aim to cut the budget deficit by over 10 per centage points by 2012. Previous Greek governments have pledged reform but consistently failed to garner the public or political support necessary to see them through.

Reason #2: a bailout is illegal under EU Treaty Law

Article 125.1 of the Treaty on the Functioning of the European Union expressly forbids one member state bailing out another. It states:

The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

Lord Lamont, Secretary of the Treasury when Britain ill-fatedly joined the European Exchange Rate Mechanism in 1990, pointed out that the Maastricht Treaty specifically ruled out such bailouts so that responsible members of the Eurozone would not have to subsidise irresponsible ones. Four German professors, including Wilhelm Noelling, the former governor of the Bundesbank, are preparing to challenge the rescue package in Germany’s constitutional court once it has passed through Parliament.

Reason #3: a bailout is unpopular

It is not difficult to see why Germans and other Eurozone publics are opposed to bailing out the profligate Greek government. Having introduced a constitutional requirement to balance its budget, the German government is now asking the public to forego tax cuts in favour of its less responsible Mediterranean neighbour. A poll by British think tank Open Europe in June 2009 found that 70 per cent of German voters were opposed to bailing out other Eurozone countries in financial trouble.


Greece is already one of the European Union’s largest recipients of subsidies in the form of structural funds. In the eyes of many German taxpayers, who also underwrite the largest net contribution to the European Union, it is undemocratic to transfer vast swathes of their money to a government they cannot vote out of office.

Reason #4: a bailout will not stop the contagion

The Greek crisis strikes at the very heart of the elite-driven post-World War II vision of a continental superstate. Greece is in a financial death spiral brought on by years of irresponsible deficit spending - spending the EU did nothing to halt.

Yet now that crisis has struck, according to German Chancellor Merkel, “nothing less than the future of Europe, and with that the future of Germany in Europe, is at stake”. Under the circumstances, if it were a truly unique, isolated case one could understand the efforts Merkel and other European leaders are making to save Greece. Unfortunately, Greece is not unique but only the first to go into meltdown.

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Nicholas Connor, an intern with the Thatcher Center, aided in the preparation of this paper. First published by The Heritage Foundation on May 6, 2010.

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About the Authors

Sally McNamara is Senior Policy Analyst in European Affairs in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies.

J.D. Foster, Ph.D., is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in the Thomas A. Roe Institute for Economic Policy Studies, at The Heritage Foundation. He works as Derek Scissor's research assistant.

Other articles by these Authors

All articles by Sally McNamara
All articles by J.D Foster

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