24/7 Wall St.

Global markets have begun to reject the value of the nearly $1 trillion facility set up by Eurozone nations, the IMF, and the European Central Bank. The influx of capital was supposed to build confidence that no nation in the region would go without financial support and that the “wolves” speculating about the collapse of several national economies would be driven from the market.

Confidence in the plan lasted only a day. The reason for mounting criticism is that the new fund may encourage Spain and Portugal to take the route that Greece has and seek massive bailouts. The problem is deeper than that. The fund provides no plan, nor can it, to solve political and social issues which have already sprung up in Greece.

The Eurozone nations and IMF offered Greece a $140 billion, three-year bailout plan. The Greek parliament voted to accept it. But Greek politicians have embraced a plan not supported by many of its citizens. They have staged violent strikes over cuts in pay and higher taxes, and, perhaps enforcement of taxes which are often not paid in the southern European nation. Greek protests could undermine the tourism industry and normal government activity. That would damage the recovery of the nation’s GDP which could cause the need for future bailouts.

The market now fears that if Spain and Portugal get Greek-like packages, that their leaders may approve the packages, but that this will only be followed by national unrest. People who have enjoyed the benefits of free-spending governments which have provided entitlement programs will fight to keep them. They will also work to keep their underground economies and ability to dodges taxes in place.

The Wall Street Journal writes that “A €750 billion ($955 billion) bailout package for euro-zone governments facing debt troubles has created another urgent challenge for European policy makers: how to keep free-spending governments in line.” That falls well short of the mark. Governments can be bought “in line.” The citizens of the economically weak nations in Europe cannot. That will almost certainly mean that dissident political factions will be elected in Spain, Portugal, and Greece. These political groups will take power because they support the notion that the austerity that goes with bailouts is too great and that currency devaluations and even default are preferable to having outside force determine government policy. Defaults, the argue, will cause creditors to accept less stringent terms. These revolts will essentially void whatever agreement Greece and probably Spain and Portugal have to support their economies. The Eurozone and IMF will be left with the issue of whether to withdraw their support. Powerful nations like Germany and France may then choose to abandon the euro as a financial glue that holds together a collapsing system.

The bailout of Euro’s troubled nations and the purchase of sovereign debt in these nations through the new financial facility will not solve a single problem. The citizens of these countries have already begun to reject the process.

Douglas A. McIntyre

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