Wednesday, March 23, 2011

German Economists & Eurozone Insolvency

On the eve of the European Council meeting, it is only fitting that we understand why eurozone survival is so controversial among its members.  We have previously dealt with the Competitiveness Pact or the Pact for the Euro in our post, "The Eurozone's Murder-Suicide Pact".  The Irish question and what Ireland ultimately decides is in its best interest will be an important factor.  The developing political crisis in Portugal, in which the opposition parties and the people are growing tired of sacrifice at the altar of the eurozone debt gods, is coincidentally timely.  Meanwhile, Merkle continues, as EuroIntelligence documents daily, to walk a tenuous weaving path in the fire pits of German politics trying to keep her political coalition together and keep the debt disciples mollified while also attempting to protect the very at risk German banks from the cascading spread of the Pan-European Credit Crisis.

Nothing exemplifies the German dilemma better than the February letter of the Plenum of German Economists which has grown to have over 200 signatures in which they opposed the extension of the EFSF and proposed it be replaced by an insolvency mechanism which would then provide for EU funding.  The original proposal is on their website here and also argued in a paper on Voxeu.  The basic concern is that any permanent ESM would require everyone guaranteeing everyone and this scares those who have benefited (not just Germans) from the current account imbalances within the eurozone.  The German economists deny the insufficiency of current EFSF funding for future financial emergencies and argue for restructuring in insolvency and haircuts for bondholders.  They see no hope of growth resurrecting indebted countries from their debt-filled wayward behavior.

Klaus Regling, the head of the EFSF, immediately accused them of the fallacious belief that the market is always right, when the financial crisis has proved it wrong.  Their low figures on the Greek and Ireland bailouts and potential bailouts of Portugal and Spain were immediately challenged by many including the Herd Instinct column in Der Zeit.  Wolfgang Munchau took them to task for not only getting the figures wrong but for blindly ignoring that the eurozone does not have a macroeconomic operating manual.  Paul de Grauwe continues the criticism that they do not understand a monetary union, adds they wish to punish rather than cope with real moral hazards, and lack a basic understanding of how financial markets actually function.

This factual and economic refutation of their position has done nothing to lessen their true believer, rock solid position with its adherents in Finland and the Netherlands and its fellow travelers in France and Italy as well as other eurozone countries.  Nothing will deter these European debt disciples and the German economists in their worshiping of the gods of debt in which even their confessions of guilt are fear of debt, just as the single German word "Schuld" means both debt and guilt.

Germans have only to look to their 1931 currency crisis to understand how a credit crisis can cascade from misguided austerity when fiscal stimulation and jobs were ignored.  These German economists are flying blind in their sleep grazing contently with the herd.  An insolvency mechanism would doom one eurozone country after another as they succumbed to the cascading credit crisis transmogrified into a currency crisis until the last few left drew their swords in duel.  An insolvency mechanism would so deeply threaten European banks, particularly German and French banks, that it would be ultimately suicidal.

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