An elementary lesson of economics is this: If the benefits of an action accrue to the agent but many of the associated costs can be shifted to another party, there will too many such actions.
Consider now Greece. Its welfare state is out of control. The effects of this fiscal problem threaten its bond ratings. It is in violation of the fiscal rules of the European Union. At the same time, the value of the euro is threatened. The German government is thinking seriously of bailing out the Greeks with debt guarantees to avoid contagion effects.
So now the problem of moral hazard raises its ugly head. The power of precedent is such that if Greece is bailed out, what incentive is there for other countries to restrain the growth of their expenditures?
I do not believe that even if Greece defaults on its bonds that the contagion effects would be intolerable. But the main problem is that the unsustainable welfare states in Europe and the United States are, well, unsustainable.
People like to deny reality when it is unpleasant. This is not just a problem of bad leadership. It is a problem that goes to the heart of the fantasy world the typical voter lives in. But reality bites. Let’s see how it does so in the next few years.
In the meanwhile, we can hope that the German government comes to its senses.
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