No Automatic Bailout for Greece

Europe should ideally avoid the automatic bailout and the transfer systems of confronting financial difficulties.  Both strategies would require a strong sense of community backed by powerful political and financial institutions.  The level of regulation and high penalties required by such systems would be impossible to apply to a bnkrupt state.  You cannot meaningly fine a bankrupt, particularly one runnig a Ponzi sheme.

The better solution for the longer run is to make it clear to the PIGS that bankruptcy is a real possibility.  And lenders at high-interest rates should realise that they receive high rates to compenste for high risks of default.

Financial markets, European politicians, and the Greeks all have to learn that Greece can be allowed to go bankrupt in the interest of protecting the wider Eurozone, just as the United States can allow a great bank, large company, or a state to go bankrupt without threatening the dollar.

As German Chancellor Merkel has realised, it cannot be good to simply rush to rescue profligate Greeks without imposing strict regulation and penalties.  The difficulty is that it is meaningless to fine a bankrupt, particular one runnig a Ponzi scheme.

Unfotunatley, in part due to the ignorance exhibited by the financial markets, lenders, politicians, and Greeks the possibility of bankruptcy has not been properly understood.  Perhaps less surprisingly, lenders of high risk funds receiving high interest rates as a compensation for the higher possibilitiy of default, now believe that Eurozone states should guarantee repayments.

There is little moral justification to assit Greeks or those who financed their irresponsible expenditures.  The only real reason to assist Greece is the level of short run collateral damage that may be inflicted on other members of the Eurozone if Greece does go bankrupt.

Links:
http://www.project-syndicate.org/commentary/sinn31/English#comments