Monday, 18 April 2011

Hannan: Ten reasons why Britain shouldn't join the Portuguese bailout

Daniel Hannan continues to speak sense on the Portuguese situation. I can't resist reproducing his latest post in full:

1. We won’t see the money again. It is becoming increasingly clear that Greece will renege on its debts. International loans are always arranged so that the IMF gets its money back first, which means that the EU will take the hit. Portugal’s debt is growing faster than its GDP, making a default almost inevitable.

2. We can’t afford it. If we look only at the cuts in selected government budgets, and ignore the increases in other areas, we can find a total of £6.2 billion. The likely British contribution to a bail-out is £4.2 billion. Why no TUC march about that?

3. It’s illegal. The euro was only agreed in the first place on the basis of a “no bail-out clause” inserted into the Maastricht Treaty in the clearest language that lawyers could devise. Such loans, in other words, don’t simply lack a legal base; they are explicitly prohibited. As Angela Merkel observed, shortly before agreeing to precisely such a bailout: “We have a Treaty under which there is no possibility of paying to bailout states.”

4. It is undemocratic. The Portuguese government fell on 23 March, and a general election is due on 5 June. In the mean time, there is no elected ministry to negotiate the loans. Eurocrats, of course, are delighted by the vacuum: they are much happier dealing with officials than with politicians; politicians, after all, have the inconvenient habit of reflecting the views of their constituents. No danger of that here. As one Commission official observed: “They have to remember it is not their programme, it is ours”.

5. You don’t help an indebted friend by pressing more loans on him. There is an argument for helping Portugal by restructuring its existing debt; there is no argument whatever for increasing its liabilities.

6. This is about rescuing the euro, not about rescuing Portugal. The bailout money will go to European bankers and bondholders, the repayment will come from Portuguese taxpayers. The people of one of the poorest states in Western Europe are being burdened with the cost of propping up the entire European banking system.

7. Portugal won’t recover until it leaves the euro. Decouple, devalue and – if necessary – default. Only when Portugal starts tailoring its interest rates and exchange rates to suit its own needs will it be able to price itself into the market.

8. Greece and Ireland are being forced to contribute. There are two separate EU funds in play: one which imposes obligations only on eurozone members, and one which covers all EU states. Ireland and Greece can stand aside from the first, on grounds that they have already requested assistance; but they cannot avoid the second. They will be forced to borrow hundreds of billions of euros to send to Portugal. Britain should champion the interests of these countries, as well as of every other EU state that has kept its currency. If the eurozone members want to rescue Portugal, let them do it with their own money.

9. Rejecting the deal would strengthen the Coalition. There is a slightly unedifying row going on about whether George Osborne went along with Alistair Darling’s decision to join the bailout fund. Darling says Osborne agreed, Osborne denies it. My guess is that the arrangement was presented to both men as a fait accompli by our Euro-fanatical Brussels officials. The clearest way to end the argument is for the Chancellor to say: “This agreement was reached by my predecessor after his party had been rejected at the polls. I do not consider it binding on this government. I have consulted with Treasury lawyers, who tell me that it is patently against the EU treaties. I am therefore refudiating the deal. I have instructed my department to withhold an equivalent sum from Britain’s EU budget contributions, and I am prepared to fight the issue through the courts”.

10.Portugal is our oldest and truest friend in Europe, and has ranged itself alongside us in quarrel after quarrel. We were prepared, through the centuries, to support our allies against pressure from Madrid and Paris. If we will not now support them against pressure from Brussels and Frankfurt, who will?

It's natural to wonder whether strengthening the Coalition (point 9) is really in the interests of the British people, but the realistic alternatives still seem worse. As bad as things are under our Coalition overlords, think how much grimmer it would be under Labour, or a Labour-LibDem coalition.

My only real disagreement is with point 7, where Daniel says Portugal should "decouple, devalue and – if necessary – default". I think Portugal should decouple (from the Euro), but its next step should be to default, not to devalue. As I noted in the comments,
Honest, outright default is far less harmful than stealth default through inflation, especially for innocents who opposed government profligacy.

It is those who were foolish enough to lend to the Portuguese government that should suffer, not taxpayers.

Although our situation isn't yet as bad as Portugal's, at least according to the official figures, we too should default.

Government bond holders are slave owners. They have no moral claim against us, much less our grandchildren. The debtor-creditor relationship is not equivalent to what you find in the private sector, because it does not involve the consent of all parties.
It's perhaps a bit over-the-top to compare bond holders to slave owners, but the parallel is a strong one. As Rothbard puts it,
The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people's property, and both deserve the back of our hand.
Even if you think that Britain and the Portugal should not rush to the bold step of outright debt repudiation, it is plain that the proposed bailout will exploit taxpayers in both countries, for the sake of bankers and bureaucrats.

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