Politics Trumps Economics

As I expected, the politicians have done a deal on Greece. I understand why it happened, but it does not make much economic sense for anyone.

Everyone knows that the Greek debt will never be repaid, so it would be logical to cancel some of it now. A rational banker would write some of it off as a bad debt to get it off his books, but this debt is controlled by governments, so that cannot happen. Greek politicians would never accept any forgiveness of debt, so Angela Merkel has had to veto all proposals that involve debt reduction. Instead, she is advocating debt deferral, because it maintains the illusion that the debt has to be paid. Politicians often prefer a politically-acceptable illusion to an uncomfortable reality, but they will not get their money back.

The Greek Prime Minister knows that his government cannot continue to spend more than it earns forever. I presume that he knows that Greece would be better off in the long-term if it was out of the Euro system. He must also understand that the short-term pain could be terrible. Politicians always think about the short-term, because in the long-term they are retired or have a highly-paid job in an NGO. Therefore, he is never going to choose a policy that will bring short-term pain, even if it will bring economic benefits in the long term.

So the Greek Prime Minister has chosen to accept an austerity deal imposed by the Germans. Not only will this deal cause short-term pain, it will limit the Greek future. The difference is that the Prime Minister does not have to take responsibility for the pain. He can blame in on the German bullies. A deal that makes no economic sense, makes political sense, because the politicians can pass the blame.