The financial crisis of 2008, still far from over, has done severe damage to the reputation of the free market. The crisis, we are assured, was caused by the withdrawal of the state and an excess of deregulation. To get out of it will thus require a massive return to public spending and intervention, which is in fact what we see happening all over Europe and in the United States. However, what we might call the Greek affair should make us question the statist solution. We ought to consider the possibility that public management could prove even more dangerous than private—that state regulation is no less chancy than deregulation.

The duplicity and corruption of Greek public accounting was more than an error of bookkeeping. The concealment of the country’s real budget deficit necessarily involved a gigantic network of complicity that included the whole political class, the state bureaucracy, and the banks. This network was not confined to Greece: it included Greece’s European partners, Europe’s political leaders, the governors of the Eurozone, the directors of the European Central Bank, and the European Commission. It’s hard to believe that the European Commission’s Directorate General for Economic and Financial Affairs was ignorant of what was really happening in Greece; and it will come as a surprise to some but not others that Eurostat, the statistical institute of the European Commission, has for years been publishing deliberately false numbers that make the phony accounting of the ratings agencies implicated in the 2008 financial crisis pale in comparison.

What was the motive for all this deception? Obviously, to give credibility to the euro, a common currency supposed to rival the American dollar. Recall that the theoretical virtue of the euro is to bring down interest rates in Europe: the more solid the money, the lower the rates, which encourages economic development (or, in the case of Spain and Portugal, real-estate speculation). It was therefore much to Europe’s advantage to cover for Greece and protect the euro.

What’s telling is that the people who brought the hoax to light were neither the Greek nor the European authorities but private speculators. The Greek state, to its great dismay, suddenly discovered that it could no longer sell treasury bonds on financial markets at the same rate as the Germans did. The open market had decided that euros owned by Greeks were not the same as euros owned by Germans. Should we blame these private actors for exposing the truth? On the contrary: it was their professional duty to generate profits for their clients, often for their retirement accounts. The public actors, for their part, were duty-bound in principle to manage the euro through predictable and transparent rules. It is therefore inappropriate for French president Nicolas Sarkozy and Greek prime minister George Papandreou to accuse private speculators of “attacking” the euro. If the euro—at least in Greek hands—had been above suspicion, it would not have been attacked.

Beyond the Greek affair, moreover, it’s suddenly evident that the Eurozone as a whole suffers from awful public management. Not a single government in the Eurozone (Germany remaining the most virtuous, to be sure) respects the two requirements that the euro theoretically imposes on states using it: a public deficit that’s less than 3 percent of GDP and a public debt that’s less than 60 percent of the same. After Greece, the states with the largest debts are Ireland, Spain, and Italy, followed by a second group that includes France and Portugal.

How did the Eurozone become so badly managed and, in the end, so unpredictable? Adverse local traditions—the spendthrift state in France, the lying state in Greece—endured, and a Keynesian catastrophe compounded them. In the name of crisis management, Keynesian ideology led to a sort of renationalization of the European economy. Perhaps the return of statism helped prevent a deeper depression; we’ll never know for sure, because the Great Crisis never happened. But what has been proven, at least to a high degree of probability, is that the renewed energies of statism have left behind a fragile euro and unmanageable public debt. The United States should take no comfort in the euro’s problems, by the way. The leading credit-ratings agencies have just warned that they may downgrade American debt—unsurprisingly, since all Western countries that follow the Keynesian road flirt with bankruptcy. We are all Greeks now.

Economics can be a cruel science because it offers a choice between imperfect solutions. On the one hand, markets are unpredictable—and vulnerable to speculative crises and private failures—but they lead, on the whole, to general development, as history has amply demonstrated. On the other hand, public intervention offers short-term security but generates risks more serious than those of market uncertainty—namely public debt, inflation, and stagnation. The usual choice in economics is not between good and evil but between more evil and less. The path is narrow but known.


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next