Germany, Europe's richest country, should not accept responsibility for debts built up by Italy, Spain and Greece from long before the euro was established.
Helping hands: German Chancellor Angela Merkel reacts during the debate about the eurozone bailout fund at the German parliament in Berlin Photo: AP
By Andrew Lilico 8:09PM BST 29 Sep 2011
Yesterday, the German parliament backed the expansion of the eurozone bailout fund – the European Financial Stability Facility (EFSF) – voting to raise the lending capacity of the fund to 440 billion euros, up from 250 billion euros. If German parliamentarians had rejected the expansion, it would have thrown the eurozone authorities’ attempts to preserve the euro into disarray.
One concern in Berlin was that, despite assurances to the contrary, once this vote went through, it would be used to justify a further expansion or another form of “debt pooling” — that is to say, an arrangement under which the Germans, Finns, and other wealthier members of the eurozone shouldered the responsibility for the debts of Italy, Portugal and other high-debt members. That suspicion was not allayed by the fact that many in the financial markets seemed to share it. Indeed, the recovery in stock prices earlier this week has been attributed precisely to the belief that in the end, the Germans will agree to debt pooling.
Almost every scheme suggested recently for saving the euro — eurobonds, a leveraged two-trillion-euro EFSF, the European Central Bank guaranteeing to buy all the debts of Italy and Spain — is simply a variant on the same debt pooling theme. They are all just more or less complicated ways to make Germany, Finland etc responsible for the debts of Italy, Portugal etc. The Germans keep saying, “We’re not going to agree to debt pooling”, and everyone else — the markets, the European Commission, the G20, the Americans — keeps coming back with more and more fancy schemes for precisely this, as if the Germans might eventually give up and agree.
I don’t believe they will. I don’t believe they should. And I believe that if they did, it would probably bring about the swift demise of the euro. Debt pooling would not be the salvation of the euro; it would (at best) be a mechanism to achieve its orderly death. The Germans should not accept responsibility for debts built up by Italians over decades, from long before the euro was established. And if they were to do that, then all incentives for fiscal discipline in the eurozone would be gone. Germany’s credit rating would drop, and its own debts would become much more expensive to service. This route is foolish and impossible. That supposedly intelligent bureaucrats keep proposing essentially the same concept over and over and over again illustrates the policy vacuum in the eurozone.
There are three groups of crisis countries in the eurozone. First, the unsalvageable: Greece and Cyprus. Second, the countries with banking sector crises but not over-indebted governments: Ireland and Spain, and perhaps Belgium (though its government debt is rather high, also). Third, the low-growth, high-government-debt countries: Italy and Portugal.
Related Articles
Germany, Cyprus and Estonia ratify EFSF upgrade 29 Sep 2011
UK has become a nation of zombie companies 29 Sep 2011
Is the euro's survival in Britain’s interest? 29 Sep 2011
Merkel wins crucial euro crisis vote 29 Sep 2011
Barroso backs EU tax on City deals 29 Sep 2011
There must be different solutions for these three groups. Greece will default. I assume it will exit the euro, along with Cyprus. Ireland and Spain (and, to a lesser extent, Belgium) can resolve their issues fairly straightforwardly, by imposing losses on the bondholders of their banks. They do not, fundamentally, have significant sovereign debt problems.
Portugal and Italy are trickier. There can be no euro (or European Union) without Italy, so exit is not an option. Instead, Italian and Portuguese growth must be raised, so these countries can service their own debts. The way to do that is for the stronger eurozone members to send money every year, for decades, to the EU in Brussels, and the EU then to spend that money in Italy and Portugal, thereby raising their wealth just enough that they can service their own debts. This is not legally problematic, as it has already happened for decades under what are called the EU “structural funds”. All we need is a eurozone-only version of these structural funds.
Increased growth for the weaker members, not debt pooling, is the way to save the euro.
Stop asking Germany to pay, and you might save the euro - Telegraph
