Europe’s stronger economies must keep the financial barbarians at bay.
By SETH J. FRANTZMANMerkel reuters 311(photo credit: REUTERS)The writer has a PhD from Hebrew University, and is a fellow at the Jerusalem Institute for Market Studies.The financial barbarians are at the gates of the Euro. Ironically, today it is Germany – home of the barbarians who destroyed Europe’s first common market, Rome – that is standing against the new debt-indulging savages.In recent days European Union bureaucrats and other commentators have been arguing that a long term solution to the debt problems haunting certain European countries could be found in Euro bonds.Olli Rehn, EU Economics and Monetary Affairs commissioner, has explained that “These euro securities would aim to strengthen fiscal discipline and increase stability in the euro area through the markets.”President of the European Commission José Manuel Barroso has been arguing for months that a common Euro Zone bond might be a good idea. He said in December: “Let us not kill the euro bonds idea for the future, but let us concentrate now on what we can do quickly.”
A 2011 paper by Prof. Nicholas Economides and Prof. Roy Smith at NYU suggested a similar type of bond for Europe called a Trichet bond, after European Central Bank president Jean-Claude Trichet. In this scenario, the EU would issue bonds that could be exchanged for the rotting debt of certain EU nations.“Present holders of sovereign debt will be exchanging low-quality bonds with limited liquidity for higher-quality bonds with greater liquidity.” They also argued that “without a workable EU remedy for the sovereign-debt problems, countries like Portugal, Spain and Italy are being treated by the market, (which so far has ignored the European rescue fund and related efforts to calm the crisis) as potential defaulters.”The idea being presented is that the EU should issue a form of debt in order that junk bonds can be traded in for higher-quality bonds.This is sort of like the collateralized debt obligations that allowed supprime mortgages to be resold as “safe” investments – the shenanigan that created the American financial meltdown of 2008. The idea for the Euro bond is only slightly different than the Trichet bond; it supposes that the EU create bonds that the 17-nation EU would be responsible for repaying in order to refinance the debt of countries that can’t keep themselves off the hooch.GERMAN CHANCELLOR Angela Merkel and French President Nicolas Sarkozy have both rejected the idea of Euro bonds. Commentators have pointed out that issuing such bonds might go against the constitutions of member states. It would also increase the power of the EU, and diminish the budgetary independence of the member states.
Goldman Sachs economist Dirk Schumacher noted that it would mean “further change of the institutional setup of the euro zone, with more oversight and control from Brussels.”Those promoting Euro bonds are trying to push them through the door when European countries are at their weakest. They claim they are the only way to save the Euro.In essence they are using the crises to forever weaken the rights of hardworking, financially responsible Europeans, pushing through a new financial instrument that would compel the Germans and French to work forever in a form of indentured servitude so that Greek, Italian and Spanish governments can continue to rack up debts. It is a twisted form of Karl Marx’s 1875 creed “from each according to his ability, to each according to his need.”The Germans and French have the ability, the others have the need.The problem is that the Germans and French (and other responsible European nations) are already being forced to pay for the mistakes of weaker economies. In May 2010, as part of a rescue package to save European debtor nations, the European Central Bank (ECB) began purchasing the sovereign debt of those countries. So far it has bought 110 billion Euros worth of Spanish and Italian debt. The reason is to keep the borrowing costs of these nations lower, keeping their interest rates lower so they don’t get themselves even deeper in debt. This is a short-term solution of course; the ECB can’t buy debt forever. In fact, the cap on this latest bailout fund is 450 billion euros. But the ECB has been right to try to stem the flow, because some of the rise in interest rates on these nation’s bonds have been caused by speculators.THE PROBLEM with the EU-bond scenario is that it would make Germany responsible for the actions of others. Greece has managed to rack up debt to a tune of 160% of its Gross Domestic Product (GDP), while Italy’s is at 120%. By contrast, Germany owes just 80% – still a high figure. Germany is Europe’s most productive nation, and the anchor of the Euro, yet it is being pushed into a corner. There is a belief that if Greece or Italy is allowed to default on its debt that the debt contagion would spread to France and then to Germany. To save Germany, therefore, the financial barbarians must be kept at bay.But the problem is that the barbarians are already inside the gates, and are being allowed, every day, to eat away at the sound policies of other countries. The solution shouldn’t be to give the barbarians a blank check called Euro bonds that allows them to make other nations keep paying for their mistakes.
