The Greek bailout

The is a ripple in the news with regard to whether or not US funds should be used to bail out the Greek government. Some of the money to be used for the Greek bailout is to come from the International Monetary Fund and the USA is the largest contributor to that institution. Translating the numbers to the American share, we would be contributing something in the area of 8 billion dollars to the Greek bailout. The simple answer to this is: "So what?" The USA is a member of the IMF, but we alone do not get to decide how the IMF funds are used. Over the years, the IMF has rescued many countries and helped the monetary system function without too many hiccups.

There is, however, a bigger issue with regard to the Greeks, namely: will GReece be able to recover from its current problems or is the bailout just delaying the inevitable. Normally, a country that is in such desperate straights suffers the loss of value of its currency. This makes imports into the country more expensive and exports more competitive. There is often an export led growth spurt which allows the economy of the country to grow and help resolve the problem. When this export growth is combined with austerity at home, the country can often make a full recovery. Greece, however, cannot devalue; it is part of the Euro bloc and it will get no advantage for its products over those of its neighbors. Instead, Greece will have to succeed on the basis of cuts to its government alone. Since on third of all Greeks work for the government or government owne industries, there is a potent political bloc preventing too many cuts in spending. Just look at the riots that greeted the minor cuts just adopted. So Greece is facing political turmoil over the cuts, an unlikely ability to maintain the necessary cuts if they are achieved, and a lack of growth to move GNP high enough to pay off the debts.

So far, there appears to be sufficient will in Greece to make the cuts that are needed. We will not know for sure, however, until after the next election.