The Tragic Greek Sideshow

Editorial do WSJ

The good news about the latest Greek bailout is that it is much less consequential to Europe or the global economy than the first bailout two years ago. The tragedy is that the cost will be the crushing of the Greek economy and the diminishing of democracy—in its Athens birthplace, no less.

More than saving Greece, the last two years have been mainly about insulating the rest of Europe from Greece. This Europe has gradually done. Tuesday's bailout takes another such step by protecting the European Central Bank from taking losses on its Greek bonds, while forcing private bondholders to take losses of as much as 70% in net present value.

This is a far better deal than they arguably deserve, given that Greek debt will remain above a crippling 120% of GDP even under the most optimistic scenarios. A better outcome would have been a steeper haircut and greater debt reduction, but that would have hurt the European banks that lent so much money to Greece. It also might have made the banks less eager to lend to other European countries.

But if Greece is now a sideshow, it is a tragic one. Under the burden of debt and austerity policies, the Greek economy won't recover for years. Some of the reforms imposed on Athens by the rest of Europe will force spending cuts that were inevitable and will be beneficial in the long term, such as the job cuts in Greece's bloated government. But what Greece really needs are supply-side reforms that will make it easier to form new businesses, attract new investment, and keep Greek young people from fleeing the country.

Most striking in this deal is the damage to Greek self-government. The EU's price for this bailout were assurances from Greece's two biggest parties—Pasok on the center-left and New Democracy on the center-right—that they maintain current policies after elections this spring. Party leaders swallowed that pill to get the bailout, but Greek voters are understandably dismayed.

This tension—between democracy and sovereignty on the one hand and technocracy and "solidarity" on the other—has long been at the heart of Europe's unity project. Europe's solution for Greece has been to lurch even further in the direction of central control at the expense of local democracy. As so often is true in Europe, what goes by the name solidarity is really the self-interest of the strongest countries.

It would have been far better had Europe let Greece default two years ago, reducing its debt to manageable levels and confronting the economic pain of reform earlier. The rest of Europe may congratulate itself this week on one more example of its "solidarity." But two years later, everything is worse for Greece. This is not the glory that the founders of the euro project imagined.