M2RB: Metallica
Are you pacified?
All the wants you waste
All the things you've chased
Then it all crashes down
And you break your crown
And you point your finger, but there's no one around
All the wants you waste
All the things you've chased
Then it all crashes down
And you break your crown
And you point your finger, but there's no one around
Nein! Nein! Nein!
By Hans-Werner Sinn
ALTHOUGH Europe may seem far away from the economic life of the average
American, the fate of the euro zone weighs heavily on the United States
economy. Pension funds have invested in bonds issued by southern
European states, while banks and insurance companies have underwritten a
sizable fraction of the credit-default swaps protecting investors
against default.
It’s no wonder, then, that President Obama is urging Germany to share in
the debt of the euro zone’s southern nations. But in doing so, he and
others overlook several critical facts.
For one thing, such a bailout is illegal under the Maastricht Treaty,
which governs the euro zone. Because the treaty is law in each member
state, a bailout would be rejected by Germany’s Constitutional Court (which stated this in a ruling on 7 September 2011. Soph)
Moreover, a bailout doesn’t make economic sense, and would likely make
the situation worse. Such schemes violate the liability principle, one
of the constituting principles of a market economy, which holds that it
is the creditors’ responsibility to choose their debtors. If debtors
cannot repay, creditors should bear the losses.
If we give up the liability principle, the European market economy will
lose its most important allocative virtue: the careful selection of
investment opportunities by creditors. We would then waste part of the
capital generated by the arduous savings of earlier generations. I am
surprised that the president of the world’s most successful capitalist
nation would overlook this. (Herr Sinn, you shouldn't be. We're not. Pay closer attention and you'll no longer be surprised either. Soph)
This does not mean there can be no systematic risk-sharing between the
states of Europe. But for that to happen, the countries should first
form a common nation, with a constitution, a common legal
superstructure, a monopoly on power to ensure obedience to the law and a
common army for external defense.
Twice
in the last century, Germans have lost their entire savings due to
political and economic decisions. It isn't hard to understand why they
are reluctant to underwrite more of the debt of their profligate
neighbours.
Otherwise, there is nothing to counter the strong centrifugal forces
created by redistribution schemes, which would inevitably lead to
political eruptions that would threaten the stability of the Continent.
The European Union has enjoyed a long period of stability because it
abstained from sizable interregional redistribution. This period would
end if we redistributed incomes or debt without creating a United States
of Europe.
Unfortunately, not one of these conditions is met in Europe today and
won’t be in the foreseeable future, because the euro zone countries,
above all France, are unwilling to give up sufficient sovereignty.
Even a European nation, however, should not socialize debt, a lesson
demonstrated by the United States in the 19th century.
When Secretary of the Treasury Alexander Hamilton socialized the states’
war debt after the Revolutionary War, he raised the expectation of
further debt socialization in the future, which induced the states to
over-borrow. This resulted in political tensions in the early 19th
century that severely threatened the stability of the young nation.
It took the experience of eight states and territories going bankrupt in the 1830s and 1840s
for the United States to shed socialization. Today no one suggests
bailing out California, which is nearly bankrupt but is expected to find
its own solutions.
Criticism of bailouts in general does not mean, however, that Europe
should eschew immediate help to crisis-stricken southern European
countries. While help to avoid insolvency is dangerous, help to overcome
brief liquidity crises is justified. The European Economic Advisory
Group, an international think tank, has proposed providing liquidity
help in the first two years of a crisis, with selective defaults
according to maturity and socialization of excessive losses thereafter.
We are, however, already in the fifth year of generous liquidity help to Europe’s uncompetitive members. Since late 2007, the European Central Bank has helped with an international shift of refinancing credit, also known as Target
credit, from the core euro states to the periphery, to which the German
Bundesbank has contributed $874 billion. Greece’s and Portugal’s entire
current account deficits were financed that way.
Moreover, since May 2010, the E.C.B. has bought more than $250 billion
in government bonds, while nearly $500 billion has come from rescue
programs and help from the I.M.F. Add to that two European rescue funds,
and you have a total of $2.63 trillion.
It is unfair for critics to ask Germany to bear even more risk. Should
Greece, Ireland, Italy, Portugal and Spain go bankrupt and repay
nothing, while the euro survives, Germany would lose $899 billion.
Should the euro fail, Germany would lose over $1.35 trillion, more than
40 percent of its G.D.P. Has the United States ever incurred a similar
risk for helping other countries?
Some critics have argued that Germany, having benefited from the
Marshall Plan, now owes it to Europe to undertake a similar rescue.
Those critics should look at the numbers.
Greece has received or been promised $575 billion through assistance
efforts, including Target credit, E.C.B. bond purchases and a haircut
after a debt moratorium. Compare this with the Marshall Plan, for which
Germany is very grateful. It received 0.5 percent of its G.D.P. for four
years, or 2 percent in total. Applied to the Greek G.D.P., this would
be about $5 billion today.
In other words, Greece has received a staggering 115 Marshall plans, 29
from Germany alone, and yet the situation has not improved. Why, Mr.
Obama, is that not enough?
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