UK governments have a weakness for bail outs which often don’t work.
Years ago the bail outs went to distressed nationalised industries. Regularly the great state owned companies found they could not live within the often generous totals of money the Treasury offered them. The managements became adept at working out how to force the hand of successive governments. They demanded more money and threatened unfortunate consequences if it was not forthcoming. It was usually granted. The performance of these big industries fell further and further behind the world’s best. The customers got a bad deal and the taxpayers got a bad deal. Many of the employees lost their jobs.
In 2007-8 some of the banks became state pensioners. Governments in panic foolishly decided to prop up banks that were too large or which had failed business models. Instead of forcing them to sell assets, slim down, cut costs, and take other action appropriate to their errors, they were transferred in all their imperfections into taxpayer ownership. The UK government should have protected UK depositors but not whole banks. We are still paying the price for this.
Now in 2010-11 government is helping bail out whole countries that have made a mess of running their affairs. In some cases, like Ireland, the state needs a bail out so it in turn can afford to pay for the bail out of its banks. Governments which thought that transferring damaged assets from banks to governments would solve the problem, now find it is difficult even for the state in some cases to afford the losses. In other cases European states need bail outs because they are in the wrong currency at the wrong exchange rate. Greece cannot compete as an economy and provide all the jobs its citizens need because it is locked into the Euro at too high a rate. In consequence it needs to pay much more out in unemployment benefit and the like. Now it wants others to lend it the money.
The message is bail outs do not work. You need to solve the underlying problem. In the case of the nationalised industries they needed to concentrate on winning more business and raising their efficiency. They now do this in the private sector without recourse to public subsidy. In the case of the banks they need to sell off businesses and assets they cannot afford and cut their costs. Public ownership has delayed this necessary process of adjustment, allowing them to continue with high salaries and ownership of too much. Now governments are in the queue to be let off having to make some sensible but tough decisions.
If a country is in the Euro and is not competitive it needs to leave the Euro or cut its costs drastically. If a country is spending too much it needs to cut its spending. If a country cannot grow in the Euro it may have to leave. If a country is being placed at risk by supporting too many large banks, it needs to work on an accelerated programme of asset sales, cost cutting and reorganisation of the banks.
Always seek to resolve the udnerlying problem. Bails outs may buy you a few months. You end up with the same problem, and even more debt to pay off.