European Economic Community Planning to Commit Non-Fatal Suicide over Greece Bailout

Non-Fatal Suicide (def):  A set of actions, policy decisions, strategies and positions taken by a business, regulatory agency or government which are so self-destructive that they would cause the demise of a lesser organization, but only inflicts huge but non-fatal harm to an organization that is strong enough to withstand the self-destructive behavior.

The European Community,seem determined to take a series of steps, which if fully implemented would lead to severe destruction of the value of that entity.  If current policy is carried out it could well earn a chapter of its own if Barbara Tuchman ever updates her classic work on the self destructive actions of nations, The March of Folly.

The Dismal Political Economist has published several screeds on the situation in Europe with respect to Greece.  This one in particular warned of the dire consequences of not modifying the terms of the Greek bailout.  In summary, the European community and the IMF provided Greek with sovereign funding in return for Greek reforms of its economy.  It was clear from the beginning that the so-called reforms were actually severe austerity that would cause the Greek economy to shrink, thus increasing its fiscal problems rather than ameliorating them.  This of course, is what is happening.

The result, as is widely known, is that Greece will be unable to return to the private markets to replace bailout debt with debt from private investors. The least worst solution is to allow a “soft” restructuring of Greek debt in which maturities are extended for existing debt, giving Greece more time to get its house in order.  Given that Greece has understandably not implemented all of the reforms required of it, this is going to take a long time.

In the news today is that one of the players, the European Central Bank, has come out strongly against any change in the Greek bailout package and debt maturities, and is insisting on Greece completing its promised reforms, that is, deflating its economy even more than it has done so.    For reasons clear to everyone except maybe the ECB, this will result in making the problem worse, as this FT article illustrates.

Greece has yet to recognize that as a large debtor, it has a lot more power than its creditors realize, namely the ability to withdraw from the Euro, set up its own currency and pay off its debt in that highly inflated currency.  The Dismal Political Economist summarized that scenario here.  

The Dismal Political Economist was only partly serious about this scenario, which would result in catastrophic damage to the European and world economies.  As time marches forward, he is becoming more serious.