The financial crisis in Greece and a proposed bailout have garnered much attention in recent weeks. 

My perspective is that Greece is a speed bump.

About a year ago, in conversation with a former co-worker (and current reader), I observed that the EU was unlikely to emerge from the global financial crisis in its present form.  The subject matter at the time was Hungary. 

Twenty months ago Hungary was a strong candidate for entry into the common currency of the EU.  That transition was speculated to take place in 2010.  Today Hungary is a financial train wreck having already endured its Greek tragedy.

The problem endemic to Hungary, Greece and most of the EU is that these countries are functionally insolvent.  EU constituents are predominantly running deep deficits, servicing large debt-loads and burdened by crushing social obligations.

Hungary, a nation of 10 million people, has three million pensioners.  The country runs deficits exceeding 10% of GDP just to pay for its social programs.  This sort of financial chicanery is unsustainable and the global crisis accelerated a recognition of insolvency.

Greece is another domino.  Like Hungary it is running 10%+ GDP deficits.  Greece is not the first EU country forced to confront a financial predicament of its own making, nor will it be the last. 

Given looming financial crises and the EU's weird strategy for dealing with them, the prospect of maintaining a unified currency and monetary policy seems bleak.

Much effort has been expended on negotiating a bailout for Greece.  The presumption is that a default would be devastating.  Thus, a costly bailout is a good investment.

I argue the opposite.  A Greek bailout spells the end of the EU in its current form.  

Spain, Italy, Portugal and Ireland face similar insolvency concerns.  As the bloated social programs and deficits of the EU's more stalwart members expand new crises will emerge. 

The Greek bailout will be expensive in financial terms.  But its real costs are the subsequent crises which will result from the EU's treatment of irresponsible member-states.  Delaying required fiscal responsibility with the elixir of checks from Belgium magnifies inevitable problems.  As defaults continue who will finance increasingly large bailouts?

At some point Germany will become weary of subsidizing the cozy lifestyles of foreign, middle-aged retirees. 

A Dose of Fiscal Reality

The EU should provide its members with a choice: Put your individual houses in order, or get out. 

Given the choice, most will implement difficult but required cuts to operating expenses.  Those that value deficit-financed social programs above EU membership and solvency will leave and default on their sovereign obligations. 

The EU is best served by a membership constituted of fiscally solvent countries, even if that membership is of a reduced size.

The US is facing similar problems and handling the situation with equal ineptitude.

Mr. Zaphirakis Goes to Washington

The partial genius of the United States was that it was a confederation of states.  When individual states made bad decisions, they were punished by free markets, and forced to put their houses back in order.  Damaging state policy was not suffered by the entire county, and competitive forces enabled and eventually required that fiscally imprudent behavior be reversed.  The polarizing immigration law in Arizona is one example of this phenomenon at work.

Today New York, California, New Jersey, Illinois and others have spent too much, accumulated unsustainable debt and obligated themselves to servicing obscene, unfunded pension obligations.  There is little difference between Greece and these poorly governed states other then the Greeks have "more evolved" social programs.

The dichotomy historically between the US and EU, though, is that states were required to stand on their own, whereas Greece will be bailed out. 

In fact, the markets have already begun to discipline states like California and voters seem perturbed.  This is how bad government is forced to correct itself.

Sadly, Congress and the current Administration have already floated the idea of bailing out each state as they are considered "too big to fail".  Without the threat of failure, and of resulting painful consequences, these states may be doomed to realize what would otherwise have been an unlikely possibility.  Bailouts discourage responsible actions and increase the likelihood of failure. 

Transforming the US into Greece

FDR and the current President want to be Greece.  They prefer a Federal model where costly social programs are imposed on all states.  If the nation is fettered equally there is no place for labor, companies and capital to run domestically.  There is no self-regulating, competitive force to reverse unsustainable policy.

In this manner Social Security, Government Unions, Unfunded Pension Obligations, Medicare, Fannie Mae, Freddie Mac, Health Care Reform, and Cap and Trade have, or will, reduce innovation, stall economic growth and imperil the nation's solvency. 

Federal social programs are disastrous precisely because there is no accountability for bad or prohibitively expensive policies.  These programs endure and expand due to their popularity amongst both beneficiaries and the politicians which support them, despite looming disaster.

Greece and its EU brethren have illuminated the future of the US if we continue down the path of Federally-administered, insolvent social programs.  And neither entrenched politicians or nor those receiving checks intend do anything about it.