Throughout the European debt crises, Germany and its allies in the austerity camp have been urged by financial commentators, particularly in the United Kingdom and the United States, to show more “flexibility” to help the high-debt countries in the periphery of the single currency union.
Such flexibility first took the form of a bailout for Greece when it teetered on the brink of sovereign default in 2010. When that failed to stem the crisis, European leaders were urged to create a bailout fund for in case other nations would find it difficult to borrow on financial markets as well. They did. Ireland and Portugal subsequently tapped into that bailout fund, the European Financial Stability Facility.
When that failed to stem the crisis, the prevailing wisdom became that the bailout fund was too small and only temporary, raising concern about Germany’s willingness to bankroll peripheral eurozone nations in the long term. So Europe’s leaders devised a bigger, permanent bailout fund, the European Stability Mechanism.
Yet the crisis goes on and the new solution floated by commentators is the pooling of sovereign debt in the eurozone in the form of eurobonds. As with the Greek bailout and the erection of the bailout funds, Germany is hesitant. It fears that financial support for troubled eurozone economies removes the incentive on their part to improve their competitiveness relative to stronger European economies which Germany sees as the way to ensure long term stability in the euro area.
Moreover, there has been growing weariness in core eurozone countries like Germany and the Netherlands to bailing out weaker euro states. The political leaders of these countries can ill afford electorally to advance schemes for further European integration, which is increasingly unpopular.
This has been seized upon by those favouring, for instance, eurobonds as proof that their solutions to Europe’s debt woes are perfectly valid. The only reason they aren’t implemented—even if, so far, they usually have been, only maybe not very fast—is that Europe’s leaders are afraid of their voters who stop them from doing what’s right.
It turns out, the proponents of further European integration are quite afraid of the European electorate as well. Writes Martin Wolf, the Financial Times‘ chief economics commentator, in a recent blog post:
I fear that austerity without end will bring about a return to the unstable populist politics the European Union was designed to prevent. That could shatter the eurozone and, with it, the EU, thereby ending the most successful attempt to build peace and prosperity in Europe since the fall of the Roman Empire.
Wolf even invokes the rise of Adolf Hitler which he claims had nothing to do with hyperinflation during the Weimar Republic but was entirely due to the economic hardships of the 1930s Depression. “Deep economic collapses are dangerous.”
Indeed they are, as they often lead policy makers to experiment with unconventional economic policies because they haven’t the patience to let the market correct itself, which is exactly what should have happened after the credit crunch of 2008. Instead, by repeated government interventions in the private economy, the recession has been prolonged and the sort of creative destruction that has to take place before there can be a true and sustainable recovery has not been allowed to occur.
Notice the panic that arises whenever a single bank is about to go under. Tens of billions of euros doled out to Spain so the country can save its troubled banks. There can be no failures because the financial industry is so interconnected — it is feared that the collapse of one bank will drag others down with it, resulting in widespread financial panic.
So we have malaise instead until Germany pulls out the “bazooka” and makes clear that it will pay everyone’s bills. That is what Wolf means when he writes that “the creditworthy country has to lend freely if a fixed exchange rate system (or in this case a currency union) is to survive.”
If Chancellor Angela Merkel announces next week that she wants to quadruple the bailout fund, that she’s willing to underwrite every bad loan both German and peripheral banks ever made, will it end the crisis?
Maybe. Or maybe markets will come to their senses soon thereafter and wonder whether the German voters wouldn’t tear up such a commitment in the next election?
Maybe they’ll even realize that it doesn’t matter as long as Greece, Italy and Spain don’t change their ways and implement the sort of regulatory, labour market and entitlement reforms that are needed to move their economies away from clientalism and protectionism toward entrepreneurship and free trade.
Wolf doesn’t seem to particularly care about the longer term imperatives. He ominously writes of “populist politics” unless a short term solution is found. Without one, he believes, “the eurozone may never reach the long term”. It’s not so much an argument as it is a threat — integrate now or the “populists” win!
In fact, the push for European integration in spite of the clear wishes of voters in core eurozone countries is exactly what fuels the anti-European sentiment that Wolf despises.
But what’s more concerning is that Wolf apparently seeks deeper European integration for political reasons, not economic ones. Which raises the question: does he want want an even bigger bailout fund, does he want eurobonds and does he want to keep the euro together because it makes economic sense for Germany and the other countries in the euro, or because he wants this political project to succeed?
This article was previously published at Atlantic Sentinel.
Wolf and the rest of the Financial Times – Economist magazine crowd are vile.
No arguments or evidence are going to have an effect on them.
A more important question is “what of Germany?”
Are there any sane voices in Germany that reject endless bailouts (and so insane they call upon the German Chancellor to stop her “obstructionism” no matter how many bailouts the lady agrees to – they seem to forget every bailout as soon as it happens can go back to talking about “tight money” and other myths).
The SPD and the CDU seem utterly wedded to the E.U. with its doctrine that every failure of “Europe” must be met with “more Europe” – i.e. every time the E.U. fails it must be rewarded with a bigger budget and wider powers.
But what of the FDP and the CSU – is there no one in these parties who doubts the line of the establishment elite?
For all these bailouts will be the ruin of Germany – even if they are fananced by yet more credit-money expansion by the European Central Bank.
The elite know this will not work for long – that is why they demand “fisal union” and that would utterly destroy Germany.
A REAL currency does not need any “fiscal transfer”.
The United States had none till the 1930s. Only a credit bubble joke of a currency demands “fiscal transfers” and such as juke curreny can not be saved by such measures anyway, they can only delay (and make WORSE) the inevitable breakdown.
As for Adolf Hitler.
Credit bubble expansion did not stop with the German hyperinflation.
Has Mr W. never heard of Ben Strong of the New York Federal Reserve and his credit bubble antics?
As for the German mass unemployment when the INTERNATIONAL credit bubble (monetary expansion) came to its inevitable bust.
The failure of the German labour market to adjust to the bust (unlike America in 1921 – but very much like America in 1929) was due to GOVERNMENT POLICY.
The government of Weimar backed the unions – real wage rates did not fall in Germany in line with the fall in output.
So OF COURSE long term mass unemployment resulted (because the price system was undermined – wages did not adjust).
But those wedded to the “demand” fallacy will not understand any of the above.
It is only a fiat currency that requires political union, because a fiat currency depends on its demand from legal tender laws and taxation. Those two requirements are probably best achieved by fiscal union and that probably requires political union.
But, a sound currency does not require any political union. A gold standard can stand on its own. It needs no taxation demand or legal tender laws.
Even Bretton Woods, a relatively weak gold standard, required no political or fiscal union.
Apart from their policy to rescue banks, I am being won over by the concept that fiscal control from Berlin is the answer to Europes woes.
The Germans have run an economy second to none over the past fifty years with a sound currency and to impose such an economy on the sinners of Europe would be, in the long term, a great service.
This time there will be no jackboots and no social cleansing; simply an economic model to die for(no pun intended)
The great danger will be for the UK in the long term, as a political and economic union, if succesful, would spell curtains.
” The great danger will be for the
UK in the long term, as a
political and economic union, if
succesful, would spell curtains.”
And why do you think we are getting the knee-jerk shrieks of EU-phobia from the Atlanticists ? They blame everything on the EU, not because it is necessarily all true, but because they fear it as a replacement to the dollar reserve currency.
Not that the euro is great. The euro would have more chance if it was 100% gold backed, instead of 15%. The relative austerity imposed by monetary union is severe, but should they somehow come through this, the dollar and pound are in serious trouble. The later two are being printed to destruction.
The argument for the Euro was lost when the European Central Bank gave in to the pressure of the international “liberal” elite and created trillions of new Euros to bailout X, Y, Z.
If they had not done that (had they allowed bankrupt banks and bankrupt GOVERNMENTS to go bankrupt)then Jim Rogers would have proved to be correct.
Sadly (like Peter S. before him) he correctly predicted what was comming – but then assumed that ECB (and so on) would act RATIONALLY (cut their loses and let the bankrupt go bankrupt).
But political insitutions (such as Central Banks) do not act with economic logic – they act with POLITICAL logic.
I suggest that anyone who thinks that the euro is backed by gold in any meaningful sense try converting euros to gold other than by buying gold in the market at the then current price.
Quite so Mr Barnett.
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