Will the Greek Bailout Work?

As expected, the European Union and International Monetary Fund have chosen to subsidize the profligacy of Greek politicians. A deal has just been announced. As the Washington Post reports:

Greece on Sunday announced a long-awaited deal with the European Union and International Monetary Fund for a $145 billion financial rescue, an unprecedented package... The three-year package is also the largest international rescue to be backed by the IMF. ...The proposed cuts in Greece include a new round of reductions in salaries for state workers, more flexibility to fire them, an increase in the value-added tax from 21 percent to 23 percent, and higher taxes on fuel, tobacco and alcohol. More state-run industries are expected to be privatized, and military spending will be slashed.

I'm not terribly optimistic about the long-run consequences. I also can't resist pointing out that the VAT has jumped from 19 percent to 21 percent to 23 percent during this crisis, which underscores how easy it is for politicians to use the tax as a bottomless ATM machine. My Cato colleague Jeff Miron shares my pessimism, writing in Forbes that:

A bailout will not address the fundamental causes of Greece's fiscal problems. Greece has an expansive but highly inefficient civil service and an economy stifled by regulation, favoritism and rent-seeking. These policies have generated double-digit deficits and a debt-to-GDP ratio well over 100%. The situation is not even close to sustainable, so absent a bailout Greece will default on its debts. A bailout, however, does nothing to fix the misguided policies that have generated Greece's existing debt and ongoing deficits. Bailout therefore merely postpones the day of reckoning. Worse, bailout both rewards Greece's bad past behavior and encourages such behavior in future. Greece will never change its misguided policies if the E.U. and IMF infuse it with new cash, just as no teenager who has overspent an allowance will reform if the parents merely expand that allowance. ...The negatives do not end with the current bailout. Greece will be back for additional bailouts in short order, since under a bailout it will not fix its underlying problems. And once the EU and IMF have bailed out Greece, they will find it impossible to resist bailouts for Portugal or Spain. As the recent downgrading of these countries' bonds suggests, they (perhaps along with Italy and Ireland) are also at risk of default in the near future. ...Rather than bail out Greece, therefore, the E.U. and IMF should allow it to default. This will hurt Greece's creditors, but those entities assumed the risk when they loaned to a country long known for its profligate ways. In contrast, a bailout forces unwitting taxpayers to foot the bill for Greece's sins. This can only breed resentment, not to mention reduced incentives for other countries to restrain their own spending.