Why another Greek bailout is a stupid idea

by Michael Schuman

Time
June 21, 2011

The entire financial world was watching Athens today to see whether or not the Greek government would survive a no-confidence vote. Thankfully, it did. More importantly, the government now has to push a new slate of severe austerity measures through parliament next week to try to control its escalating debt. If the package gets rejected, further bailout funds may not flow, and Greece would rapidly spiral towards a default with bond payments coming due next month. That would also probably dash Greek hopes for a second bailout, currently being debated by the leaders of the euro zone. So a lot is riding on next week's vote in Athens – the Greeks economic future, the direction of the European debt crisis, and perhaps even the viability of the monetary union.

But despite all of the potential consequences, I've come to believe that further bailouts for Greece are just plain idiotic, for everyone involved – creditors, the euro zone, or the Greeks. Here's why:

First, the bailouts are not actually making it any more likely that Greece will be able to pay its debts back. Perhaps just the opposite. The bailouts are trying to solve Greece's debt problem with debt. The talk is that a proposed second EU bailout could total as much as 120 billion euros. Taken together with last year's 110 billion-euro rescue, the combined bailouts could add up to a remarkable 100% of GDP. With mandated budget cuts, tax hikes and other austerity measures eating into the country's growth potential, the combination of a stagnant economy and unresolved high debt levels is not going to convince any investor to trust his or her money with the government in Athens.

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