Friday, May 25, 2012

Staring at Germany Until It Blinks.

Eamonn Butler is quite correct when he explains the plan of the F PIIGS this way:
The game now is that everyone sits round the table, staring at Germany until it blinks. Eurozone leaders figure the only way to save the euro is for all 17 member nations to get together and issue 'eurobonds'. There are some big hitters among those who think this is a really good idea – people like the new President of France, Francois Holland, the Italian Prime Minister Mario Monti, and the European Commission President Jose Manuel Barroso.
Butler seems a bit sympathetic to the F PIIGS governments that are having trouble raising money in the markets. He calls the inability to raise money in the markets sad and the idea of eurobonds "good news" for the F PIIGS.

Well,. it would be good news for the F PIIGS governments, but not so much good news for the people of those countries, which would see their central planning governments propped up, once again. And it is a real bad idea for Germany as Butler correctly explains:
So the plan is that the eurozone as a whole should step in and issue its own eurobonds. The promise to pay lenders interest and indeed to repay their principal at the end of the term would be collectively guaranteed by all 17 nations. So eurozone countries, including those in trouble such as Greece, Ireland and Portugal (and those who are likely to be in trouble soon, like Spain and Italy) could borrow at realistic rates of interest, without crippling themselves.

That is good news for the troubled countries, because it means that all countries in the eurozone would actually be able to borrow at the same interest rate.The snag is that any such country cannot actually pay its share of the interest and principal payments when they become due, the other countries would have to help them out. And the stronger countries are not exactly thrilled at this prospect.

Nor should they be. In the first place, the eurobond idea distorts the price mechanism. If you are lending to someone, the interest you get in return should reward not only your forbearance but the risk you run of not being repaid when you want your money back. Lumping risky and non-risky (well, less risky) countries together means that prices no longer reflect that risk. The risk is pooled. Specifically, the stronger countries are subsidising the risks that are being run by the weaker ones. And when you subsidise something, you generally get more of it. But who wants weak countries to live beyond their means and take a bigger risk of running out of money than they already have done? We had enough of that from the banks, thank you very much.
But the system builds in moral hazard for the over-spent, over-borrowed countries to do exactly that. Live beyond your means, and your richer cousins will underwrite your profligacy and pay people to keep lending to you. Act prudently, and you get hit for a bill from the imprudent nations.

When it comes down to it, of course, Germany has the broadest shoulders. France might think itself in the same league, but actually investors reckon that is a pretty bad bet too – all the more so now that it has a socialist president who figures that balancing the books is for the birds. The German public certainly can't see why they should pay for other people's profligacy. Germany and the other stronger countries would in fact find it more expensive to borrow themselves, because they would be sharing the cost of the weaker countries' borrowing too.

Will it happen, though? Yes, quite probably. The alternative is to let Greece slide out of the euro, followed probably by a number of others that just can't make the grade. That would be messy, and it would cost European banks a lot of money – urged on by regulators, the banks hold a lot of government bonds, which were always reckoned to be safe investments. Though now, patently, they are not. That purely financial concern is what is in George Osborne's mind. But the real concern of pretty much everyone else is a political concern: that the exit of any country marks a retreat from the EU idea of deeper and closer integration, the fear that the European Project would find itself on a falling tide. And that they find deeply shocking

And, oh yes, the European Project is collapsing, that's what may result in the eurozone eventually experiencing hyper-inflation. If eurozone leaders through eurobonds, or some other means, decide to continue to prop up the F PIIGS, the only way they can ultimately  achieve this is through major money printing by the European Central Bank---and that is the road to hyper-inflation.

Will Germany blink? German Chancellor Angela Merkel talks a lot of trash about the F PIIGS, but at the end of the day, to date, she has signed on to  bailout after bailout. There is no indication that she will not again, at the last minute, agree to some new even larger bailout scheme.


  1. Mate,
    Butler is ripping s#*^@ out of those sad little PIIGs in a way only the English can do.

    The stiletto blade of the English language, handled by an Englishman, is something to behold. Unless of course you are on the receiving end!

  2. The solution to our excessive debt problem is to look for a new kind of debt!

    This credit card is full... let's apply for another!

  3. This is the best drama going at the moment.

  4. Germany needs to beat Greece to the punch and leave the Euro first.

  5. The EU is a bankrupt paper tiger even if it starts printing billions of eurobonds. It has a declining population base due to annihilating millions during two world wars and then deciding to practice contraception and abortion ever since so as a result there is not enough people to support the welfare state and massive government payrolls. Even if it regains some semblance of fiscal and monetary sanity, it better not hope that the USA turns isolationist and turns NATO over to the EU. With Putin's Russia looking increasingly unfriendly, how does it even defend itself?

  6. Men who stare at Germany...

  7. Waiting for world government by bailout is really boring. Why don't we just have a third world war instead?