July 14, 2015

Europe's Insane Deal With Greece

If the definition of insanity is doing the same thing over and over and expecting a different result, the leaders of Europe and Greece are insane.

After a 17-hour summit, Europe's leaders have reached a deal. If the Greek parliament passes a package of reforms by Wednesday night, the country's creditors will move forward with a third bailout on terms that are much stricter than previous proposals.

If the deal proceeds, it will avert the immediate chaos that Greece's uncontrolled exit from the euro area would entail, and enable European leaders to talk about something else for a while. Unfortunately, it does nothing to address the fundamental issues that have repeatedly landed Europe in crisis since 2009. Former German Economic Minister Karl-Theodor zu Guttenberg quipped that Europe hasn’t been kicking the can down the road, it's been kicking it up a hill and wondering why it keeps rolling back on its foot.

The core issue: Although the European Union can handle economies of widely varying types and levels of development, the euro area cannot. Greece’s gross domestic product per person was about half of Germany’s when it joined the euro in 2001. Since then, Greece’s competitiveness relative to Germany’s has slid by about 40 percent.

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