For the first time ever, a clear majority (60%) of Germans no longer sees any benefits to being part of the Eurozone, given all the risks, according to a poll published September 16 (FAZ, article in German). In the age group 45 to 54, it jumps to 67%. And 66% reject aiding Greece and other heavily indebted countries. Ominously for Chancellor Angela Merkel, 82% believe that her government's crisis management is bad, and 83% complain that they're kept in the dark about the politics of the euro crisis.
The odds of a bailout of the southern European countries seem to be getting worse. At the same time, I expect their financial conditions to worsen as economic growth fails to resume. So the need for a bailout seems likely to grow. Does this mean the end of the Eurozone? Or just a splitting off of some members? Or perhaps the creation of a couple of smaller Euro currencies? Will the Germans bring back the Deutsche Mark while some neighboring countries (e.g. the Netherlands) decide to use it?
Denkverbot: a cool word. You can classify people by whether they support or oppose denkverbot. The denkverbot supporters on a particular subject may cloak their opposition to thinking thru evidence and debating a subject. But their intentions are usually clear enough.
"There cannot be any prohibition to think" just so that the euro can be stabilized, wrote Philipp Rösler, Minister of Economics and Technology, in a commentary published on September 9 (Welt, article in German). "And the orderly default of Greece is part of that," he added. Instantly, all hell broke loose, and Denkverbot (prohibition to think) became a rallying cry against the onslaught of criticism that his remarks engendered.
Once the taboo breaks against seriously considering alternatives to the current Euro zone the debate might spark a large flight of deposits out of banks in heavily indebted countries. Those banks hold lots of sovereign debt. If the southern European governments don't get bailed out then the banks will fail. You can expect to see Greek, Italian, Spanish, and Portuguese banks totter. If they aren't propped up then watch the dominoes fall. The 1931 Credit Anstalt collapse in Austria is the historical precedent most feared by policy makers.
You might think bailout is the right response to a financial crisis that has the potential to cause a big economic downturn. The problem that the Germans correctly sense is that Greece is unlikely to reform if the past pattern up the the present is any indication. Prudent people not under the sway of denkverbot would admit this.
Greece is a chronic defaulter. Since winning independence from the Ottoman Empire in 1832, the nation has spent half its time in various stages of default or restructuring.
Yet various writers keep proclaiming that surely now the Greeks have learned the folly of excess deficit spending. To which I reply: The Americans haven't even learned that lesson.
The idea, which has floated around for months without getting much uptake from European decision-makers, is to scarf up Greece's unaffordable debt on the open market and exchange it for new, more affordable long-term bonds issued by a (presumably) reformed Greek government.
The Euro zone is the creation of idealistic fools. Milton Friedman opposed the Euro founding in 1999 and commented in 2004 that its collapse was "a strong possibility". Given that the Germans have taken positions that make a Greek hard default and even a Portuguese hard default very likely if the Germans intend to eject a few Euro members they had better shift into high gear with preparations to redraw the boundaries of the Euro. The faster done the better. Read that last link. Ambrose Evans-Pritchard of The Daily Telegraph takes a look at the European debt and currency crisis from lots of angles.
The key people behind these moves also agreed that one topic was off the agenda: the possibility of a break-up of the euro and, more immediately, the ejection of Greece, was not to be spoken of in public. Chancellor Merkel warned wayward German MPs to “weigh their words very carefully”. Geithner urged EU policy-makers to avoid “loose talk”. Luxembourg prime minister Jean-Claude Juncker, presiding over the Eurogroup, called for “verbal discipline”, lest saying the wrong thing should trigger “irrational” market responses.
Right now the market is pricing in a big default in Greek debt. Is that what the German leaders have decided on? Sovereign default, prop up some banks, and then keep Greece in the Euro? If that's not their conscious choice then are they stalemated?
|Share |||By Randall Parker at 2011 September 18 09:58 AM Economics Sovereign Crises|