American Taxpayers Should Not Bail Out the European Union

from Cato @ Liberty by Daniel J. Mitchell


American Taxpayers Should Not Bail Out the European Union: "

By Daniel J. Mitchell

The fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece and Portugal getting to the point where they no longer have the ability to borrow enough money to finance their bloated public sectors (I have mixed feelings about Ireland since that nation at least has been a good example of low tax corporate tax rates, but I still think they should get punished for over-spending and bailouts). This I-told-you-so attitude is not very mature on my part, but one hopes that American politicians will learn the right lessons and something good will come from this mess.

I have not written much about the topic in recent months, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and the economic damage of rewarding excessive government. So why bother repeating myself, particularly since this is an issue for Europeans to solve (or, as is their habit, to make worse)?

Unfortunately, it appears that all of us need to pay closer attention to this issue. The Obama Administration apparently thinks American taxpayers should subsidize European profligacy. Here’s a passage from a Reuters report about a potential bailout for Europe via the IMF.

The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday. “There are a lot of people talking about that. I think the European Commission has talked about that,” said the U.S. official, commenting on enlarging the 750 billion euro ($980 billion) EU/IMF European stability fund. “It is up to the Europeans. We will certainly support using the IMF in these circumstances.” “There are obviously some severe market problems,” said the official, speaking on condition of anonymity. “In May, it was Greece. This is Ireland and Portugal. If there is contagion that’s a huge problem for the global economy.”

This issue will be an interesting test for the GOP. I think it’s safe to say that the Tea Party movement didn’t elect Republicans so they could expand the culture of bailouts – especially if that means handouts for profligate European governments. Some people will argue that American taxpayers aren’t at risk because this would be a bailout from the IMF instead of the Treasury. But that’s an absurd and dishonest assertion. The United States is the largest “shareholder” in that international bureaucracy, and there’s no way the IMF can get more involved without American support.

In some sense, this is a corporatism vs. free markets battle for Republicans. Big banks and Wall Street often support bailouts since they like the idea of somebody else saving them from their bad investment decisions (though American financial institutions fortunately are not as exposed as their European counterparts). Economists despise bailouts, by contrast, since they subsidize risky choices and lead to the misallocation of capital.

Which side is John Boehner on? Or Mitch McConnell? And what about Mitt Romney, or Mike Huckabee?

American Taxpayers Should Not Bail Out the European Union is a post from Cato @ Liberty - Cato Institute Blog

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