“Eurobonds are absolutely wrong. In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don’t get them by collectivizing debts.” – Angela Merkel
John Mills once said that crashes don’t destroy capital, they merely reveal the extent to which it has already been destroyed by its betrayal in hopelessly unproductive works. So, for instance, the housing crisis of 2008 & 2009 … & 2012 and beyond … didn’t “destroy” anybody’s housing value, it merely revealed the extent to which otherwise productive capital was wasted by throwing it into an overpriced housing assuming Keynes’s “castles in the air” model would work for ever.
The same argument holds in Greece. While I wanted to lead in this piece with “things have gotten bad in Greece” – they really haven’t. They have been bad for a long, long time, and the realization of just how bad is starting to come apparent. Promises have been made that cannot possibly be supported without the enslavement of an entire generation … and if that generation has even the mildest ability to protest enslavement, repayment is not an option.
(The same argument may hold true in the U.S., though our realization of it is likely a few decades off.)
One “solution” to the problem is the supposed “Eurobond” whereby all citizens of Europe (which means Germany) will back the debt of the rest of their compatriots. In practice what this means is that German taxpayers agree to shoulder the burden for overspending and over-promising in Greece, Spain, Italy, Ireland, Portugal … and eventually France and even Germany.
The Financial Times ran an article a few days ago in which Germany ruled out common bonds. The article notes: “Angela Merkel, Germany’s chancellor, has argued that any co-mingling of eurozone debt would remove incentives for southern economies to adopt structural reforms.”
… let’s sit and think about that one for a moment, shall we …
So, if I’m understanding Ms. Merkel correctly, forcing one country that is able to pay to cover the debts of another country that is not currently able, but is able to go about changing its ways and living within its means would be bad? Or, more to the point, removing responsibility from those who have already shown themselves irresponsible is a bad step because it will only encourage them in their continued irresponsibility? Is this what you’re saying Ms. Merkel? Are you saying that countries (which are just people) that find themselves in a bad situation (perhaps of their own making, as in this situation) should not be given a free lifeline on somebody else’s dime because it would discourage them from fixing the underlying problems?
Welcome to the revolution, Angela Merkel – we’ve been waiting for you.
Hey, while we’re at it, let’s “put on the lawyer pants and walk down this path” for just a few more moments. Try this one out at your next press conference: “banks that make bad loans should not be given a bailout on the backs of the taxpayers, because that would discourage them from making the necessary reforms in their lending policies.”
Or how about this: “people who make bad decisions with their lives should not be given a bailout on the taxpayer dime because that would discourage them from amending their bad decisions and making better, more productive ones in the future.”
Here’s another one for you: “politicians who lie through their teeth and make promises they can’t possibly keep should not be spared the wrath of the voters because that would discourage future politicians from legislating in honesty, fairness, and integrity.”
Boy, that’s a great theme you’ve hit on Madame Chancellor. It really has some broad-sweeping applications.