Fund Your Utopia Without Me.™

13 June 2012

Why Berlin Is Balking on a Bailout



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



 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? 


Hans-Werner Sinn is the president of the Ifo Institute and the director of the Center for Economic Studies at the University of Munich. 


+++++++++++++++++++++++++++++++++++


Sophie:  Another issue that Herr Sinn does not address is the disparity in labour laws between EU member states.  In Germany, the retirement age is 67 and pensions are set at 46% of one's final salary.  In Greece, for example, women can retire at 50, men at 55, and those that work in "arduous professions" like hairdressing, television presenting, and radio announcing, among others, are allowed to retire at 45.  The Greeks get 97% of their final salary.  France just lowered its retirement age to 60.  

Does any sane person actually believe that Germans are going to work until 67 so that Greeks can retire at 50 or the French at 60 and both get far more generous pensions?  It's just not going to happen and it is delusional to think otherwise.  It was folly to believe that people of such distinct cultures, values, work ethics, histories, etc., could be yoked together into a monetary union.  It will be even greater folly to think that fiscal union will work.   Does anyone believe that Italians are going to take kindly to "reforms" forced upon them by Germany?  Does anyone believe that Germany is going to accept demands for more cash to underwrite more luxurious welfare states in Greece, Portugal, France, and Italy?

It's just not going to happen.


Related Reading:


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





King Nothing - Metallica

Wish I may
Wish I might
Have this I wish tonight
Are you satisfied?
Dig for gold
Dig for fame
You dig to make your name

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
Just want one thing
Just to play the King
But the castle's crumbled and you're left with just a name
Where's your crown, King Nothing?
Where's your crown?
Hot and cold
Bought and sold
A heart as hard as gold
Yeah! Are you satisfied?
Wish I might, Wish I may
You wish your life away
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

Just want one thing
Just to play the King
But the castle's crumbled and you're left with just a name
Where's your crown, King Nothing?
Where's your crown?
Huh!
Wish I may, wish I might
Have this wish, I wish tonight
I want that star, I want it now
I want it all and I don't care how
Careful what you wish
Careful what you say
Careful what you wish you may regret it
Careful what you wish you just might get it
Then it all crashes down
And you break your crown
And you point your finger, but there's no one around
Just want one thing
Just to play the King
But the castle's crumbled and you're left with just a name
Where's your crown, King Nothing?
Where's your crown?
Oh, you're just nothing
Where's your crown King Nothing?

Oh, you're just nothing
Absolutely nothing
Off to never, never land


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