Wednesday, February 10, 2010

Wyplosz on the Eurozone Debt Crisis

Here's an excellent article by Charles Wyplosz that appeared in about facts and myths surrounding the Eurozone debt crisis. I'll reproduce in particular this passage:

Myth 6: Other Eurozone governments should support the Greek government to avoid destructive contagion. I argued that contagion need not be destructive if banks can bear it, so the need for a collective bailout is not established. There is a huge moral hazard cost, on the other hand.

Fact 6: The Treaty strictly prohibits bailouts. Art. 100(2) states: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned. Where the severe difficulties are caused by natural disasters, the Council shall act by qualified majority.” This article has been written precisely to ban bailouts. Interpreting continuing fiscal indiscipline as “exceptional occurrences beyond its control” runs against the spirit of the Treaty. Violating the Treaty to rescue countries whose successive governments have made no effort to achieve fiscal discipline over the last decade (or longer) is indefensible.

So, the Europeans at least have rules to avoid bailouts of countries (let's see now if they will stick to them). What will protect us here in the US against the coming bailouts of failing States like California? Given the track history of the current administration on these matters, the answer should be clear by now: nothing and nobody will protect us.

1 comment:

ENNYMAN said...

Your last sentence/question is dead on: what WILL protect us from having to save failed states like California?

My favorite Jeane Kirkpatrick quote: "Ideas have consequences; bad ideas have bad consequences." It certainly applies to the laws of fiscal responsibility...