It’s Never Enough

The spigot is opening wider.  Now that the German government has acceded to expanding the EU’s bailout fund beyond €800 billion ($1 trillion), the French are demanding even further expansion.

With convoluted logic, French Finance Minister François Baroin is now demanding that the bailout fund must be increased to €1 trillion ($1.3 trillion), to shore up market confidence and “prevent contagion.”  After all, he says,

The firewall, it’s a little like the nuclear option in military planning, it’s there for dissuasion, not to be used[.]

If it’s not to be used, though, where is its dissuasive power?  In order to be convincing, it must actually be spent on bailouts.  The problem is that, with bailouts there is no ability to convince the spendthrifts that there won’t be another bailout tomorrow.  Even the Frankfurter Allgemeine Zeitung has the right of this one:

The pressure on the crisis-stricken euro-zone members to carry out reforms must not be undermined by the knowledge that, if they fail, they will be caught by a financial safety net.

Bailouts are disasters that keep on destroying.

Another Precinct Heard From

Writing in Spiegel Online International, Wolfgang Kaden offers stern medicine for the present Greek crisis.  His thesis is stated at the outset:

It’s time to reinstate national autonomy—and responsibility—for determining financial policies and honoring treaties.

He goes on:

The euro has been a major experiment.  A (current) total of 17 countries with many things in common—but also many differences, such as their economies, politics, histories and ways of life—have embraced a common currency.  Contrary to the expectations of many (including myself), these differences have not grown smaller over the years.  Unfortunately, there is no reason to expect that such increased harmonization might occur in the foreseeable future.

And

…it appears entirely unlikely that European populations could be willing to, for example, relinquish their parliament’s right to make its own budget-related decisions to an EU body based in Brussels.  This also renders the notion of a fiscal union chimerical.

His solution, though, is to go back to the Maastricht treaty roots, terminate bailout efforts—and not just for Greece—and require individual member nations to see to their own fiscal houses, without welfare payments from their fellow member nations.

The advantages which he lays out for this return are these:

…going back to the original state of things also means returning to an environment controlled by market forces.

The hard truth is that the voters in each country make the final decision about whether to honor or violate treaty obligations, so they also bear the responsibility for dealing with the consequences of their own decisions.

But then he says:

Those incapable or unwilling to [toe the economic line] need to get out—of their own accord rather than by getting the boot.

But such a solution does not address the fundamental reason for the failure of the euro zone—that utter lack of a consistent world view on the part of the constituent nations.  Given the broad differences the nations have concerning, for instance, the purpose of money, such consistency is impossible—nor should one be imposed from on high.  Aside from the immorality of the imposition, and its attack on individual liberty, the imposition would be illogical.  If the member nations are to be left to their own devices in getting out of their troubles, they must be left to their own considerations of what is important to them.  Yet these differences make it impossible for every nation to toe the euro zone’s—much less the Maastricht and Lisbon Treaties’—economic line.

My take is that Greece should depart the euro zone.  Europe, as a whole, does not need a common currency.  Instead, Europe should be decomposed into separate and distinct common currency zones, each of which must consist of a far more homogeneous membership, in terms of societal imperatives and political and economic philosophies.  This greater commonality of purpose will make each individual currency zone far stronger than is the present entire euro zone, and were these currency zones to form a free trade zone the members would be yet stronger.  As for Greece, it easily could become an effective and valued member of one of these smaller, more homogeneous groups.

European Finance Crisis

I’ve written before about this subject.

The chart below is from Spiegel Online International, which has a related story, but I want to visit another aspect of this.  The chart’s breakout indicates German governmental exposure to Greek debt and that exposure’s cost to the German economy were Greece finally to default altogether on its debts.

 

The 50%, or so, haircut currently being sort of negotiated with Greece’s commercial financial institution creditors is a real default, albeit much lipstick has been applied to this PIIG’s lips, and much makeup is being added to its face.  The breakout elides those private banks and the cost to the German economy through the private sector generally; however, the governmental institution cost breakout has its uses.

The German economy is the EU’s and the euro zone’s largest, so the figures in the chart can be taken as an outer bound, within which the other European creditor nations’ costs can be assessed.  Alternatively, and perhaps more effectively, the German cost can be proportionally bounced against the other nations’ GDPs to get an idea of the costs to them, along with an idea of how expensive those costs really are.  Since I don’t have 2011 GDP figures, yet, my greasy spoon diner napkin analysis uses 2010 GDP estimates.

Germany’s 2010 GDP was in the neighborhood of €2.7 trillion.  The chart’s seemingly enormous €72 billion bite, presented without context, shrinks when compared to German economic strength: it’s about 2 2/3% of the German GDP.  The French GDP was €2.1 trillion; its proportional “share” then works out to a bit under €56 billion.  The Netherlands’ GDP was €641 billion; its “share” would be roughly €17 billion.  And so on.  It’s true enough that stronger economies will have an easier time than weaker economies, but in the end, these are sums that are easily absorbed.

To be sure, the private sector also will take hits from a Greek default.  Taking the private sector as a whole, not just the commercial bank interests mentioned above, but including insurance company, pension firm, and mutual fund holdings of Greek debt, the total private exposure works out to around €142 billion.  That’s about half the total Greek debt; it doesn’t add much at all to the GDP-based cost.  For individual economies, the ripple effects of private sector dislocations and occasional bank bankruptcies could seem sharp, but they would be short-lived.  The economies of the non-Mediterranean EU nations (yes, including France) are simply too large and too strong to suffer permanent, or long-lasting, damage.  And the private sector is the only place the hits should occur, anyway.  There’s no reason a French, German, Dutch, and so on, taxpayer—private citizen—should pay for the profligacy of a Greek government, or for that of any government other than their own.

Certainly, it would be suboptimal for Greek’s national creditors to walk away from the deals already made for a Greek bailout: even a bad contract must be honored.  But there should be—and there need be—no more public monies committed to this effort.

The Greeks will be better off, too, for having been released from their indenture to their creditors and allowed to default and to start over.