Tuesday, June 23, 2015

So what if Greece leaves the European Union?

A great column by George Will in the Washington Post.

An important reason why cities and countries often linger in poverty and decay is that their debts are not erased.

If a city is insolvent, a productive person can avoid the financial burden by moving out.  That worsens the insolvency and leaves the city a disaster area.

If the city goes bankrupt and its obligations are erased, taxes can be reduced to the point where it becomes economically viable.

Bankruptcy is likely to discourage lenders from financing another round of financial stupidity - which made the mess possible in the first place.  However, that depends on all obligations, such as pension funds, being kept fully funded at all times - so that borrowing is a prerequisite for further financial stupidity.

Bankruptcy will hurt those who were promised money.  City retirees and others who were handed excessive pensions or "deals" may deserve to be hurt.  Bondholders deserve whatever they get - or fail to get - it is their responsibility to evaluate their investments.  Bankruptcy can help current residents by making their city viable again.

In the case of countries, insolvency imposes a similar financial burden on economic activity.  However, it is much harder for people to avoid the financial burden by moving out - hence more people suffer.

Countries cannot go bankrupt in the sense that a city can.  While a country can choose to default on its financial obligations, the default is less likely to be sufficiently complete.  Many financial obligations to citizens, who vote, will remain - probably enough of them to prolong economic chaos indefinitely.

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