Battle4Liberty

The Euro is under a lot of pressure these days. The size of government has ballooned in countries like Greece, Italy and Portugal. Ordinarily this type of problem would be confined primarily to the profligate nations, but not when there is a common currency. The problems of several nations affect the entire continent, particularly the 23 that use the Euro. And what affects the Europe affects the entire world.

Investors fear government default in these nations, prompting the rest of Europe and even the United States to negotiate a bailout. The International Monetary Fund (IMF) is a key bailout vehicle, ultimately transferring a large percentage of the European risk to U.S. taxpayers. We have been told that a bailout is in our best interest, lest the crisis in Europe reap havoc on the U.S. economy. This might be true in the short run, but it’s definitely a fallacy over the long term.

The irony of the situation should be enough to raise your eyebrows. While our government must borrow from China to finance our own leviathan, we are being asked to help pay some of Europe’s. The common sense answer to the bailout question is an obvious “no,” but economists and politicians usually opt for expediency instead of rational thinking.

There’s a simple lesson to be learned here. A common currency is a horrible idea because it fosters a predicament economists call “moral hazard,” an arrangement where one party in a contract can benefit at someone else’s expense.  Health insurance is a good example of moral hazard. Individuals with low health insurance copays are more likely to visit the doctor for marginal ailments, thereby shifting some of the unnecessary medical costs to others in the pool. Each individual decries the system but has an incentive to abuse it. A certain amount of moral hazard is unavoidable, but socialism breeds it in massive quantities. Its effects are destructive, as we see in Europe.

When each nation has its own currency, the strength or weakness of the currency will depend on government and economic factors within the nation. Exchange rates can fluctuate and to punish those that are fiscally irresponsible. But when nations share a currency, their politicians have an incentive to game the system to their own advantage. Of course, member nations “agree” to follow certain guidelines designed to eliminate the moral hazard, but these are not airtight, as evidenced by the financial chaos on Europe. When Europe’s central planners originally promoted the Euro, they set the stage for the current crisis. It was only a matter of time.

Unfortunately we are experiencing the same type of problem in the U.S. States that overspend turn to the federal government for help, which directly or indirectly must come from other states that are more fiscally responsible. Liberals are happy to oblige, thereby creating greater dependency on Washington and ensuring more irresponsibility in the future. Of course, the root of this problem can be traced to Washington’s ability to churn out more dollars, but this angle has already been addressed in previous posts.

Whether it’s Italy or California, governments should be held accountable for their actions and must be required to make the tough decisions necessary to balance their own books. Bailouts simply breed more of the very behavior we are trying to eradicate. The antidote for moral hazard is personal responsibility, and it’s high time we got a good dose of it.