Here is the reason why a subscription to the WSJ is worth the money: because they run pieces by people like John Cochrane. I’ve been trying to make sense of the Greece mess, but I was missing the key. Here it is:
Letting someone lose money on sovereign debt is the acid test for the euro. If not now, when? It won’t happen in good times, nor to a smaller country. The sooner the EU commits, and other countries and their lenders come to terms with the fact that they will not be bailed out, the better.
The current course—ever-larger and less-credible bailout promises, angry German voters who may vitiate those promises, vague additional fiscal supervision (i.e. more of what just failed miserably)—is not the answer.
The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth. Countries only pay off debts by growing out of them. And no, growth does not come from spending, especially on generous pensions and padded government payrolls. Greece’s spending over 50% of GDP did not result in robust growth and full coffers. At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.
I’m pre-disposed to like Cochrane because he was a terrific teacher of mine (though I was a terrible student) and a super nice guy, but mostly I like him because he nits the nail on the head: as a currency the Euro is a great idea, but the problem is that the EU can’t decide whether it is going to be a fiscal union in addition to a monetary union, so the bond holders aren’t being required to take the hit they legitimately deserve (and need) to take for investing in Greece in the first place.
A comparison between Cochrane’s arguments and those of Paul Krugman would be interesting. But getting past the “Republicans are soooo evil” nonsense to find the actual economics is too annoying for a late night.