National Post gets it wrong on Greek bailout

The National Post published an article that is intended to explain why Greece needs to be bailed out. The author poses a series of questions and then answers them. One of the questions asked is the most important question of the whole issue:

How long are we going to keep bailing these guys out? What's the incentive for them not to just keep on borrowing too much?

The premise of this question is the fundamental problem with any bailout. At what point does it end? Once you take away most of the cost of being irresponsible, the tendency is to be irresponsible. So at what point should the government, and we the taxpayers, demand a stop to it?

Unfortunately the National Post’s answer falls short:

Good point. But that line of reasoning will probably not get us to a bailout for Greece, which is where we need to be. Unfortunately, there's no easy answer to this problem because either way there are painful potential consequences to deal with. It's just that they're a lot less painful if we go with the bailout

That line of reasoning will indeed not get us to a bailout, but it should not be so easily dismissed. The bailout of Greece is going to create a precedent in the EU that will haunt or benefit them for decades if not centuries. The National Post should not be looking purely at the short term but should be taking a longer view of the problem.

Yes in the short term a bailout of Greece will likely be the least painful option. But that ignores the long term affects and the incentives that it creates.

First, the long term results in Greece will ultimately not be beneficial. This crisis has happened to begin with because the leaders of Greece have been unwilling to handle the political cost of significant cut backs. If they are bailed out then the pressure to deal with the problem will be lessened and the politicians will continue to avoid making real cuts. In another ten years, or the next major global economic downturn, we will be exactly in the same situation.

Next, there are the long term results in the rest of Europe. Greece is hardly the only country in the EU that is overburdened with debt and deficit. Most EU countries have unsustainable debt. Once Greece is bailed out these EU countries will know that there is a safety net. They would be under less pressure to manage their own finances properly. So what happens if Portugal, Spain, or Italy goes under? How will the IMF or the Eurozone countries bailout these much larger economies?

Bailing out Greece is not the least painful option. It is merely putting off disaster today for a much larger disaster in the future.