While Europe’s monetary crisis spreads, Americans watch in astonishment as the German government bails out its feckless co-unionists. Greece’s financial predicaments boiled over last summer with baton-wielding riot police pummeling Greek civil servants who objected to their government’s modest proposal to raise the official retirement age from 61 to 63 by 2015. In response, Germany raised her official retirement age from 65 to 67 to make up in productivity what Greeks think their Teutonic neighbors owe them. Then this past fall, Ireland’s banks, choking on bad residential and commercial mortgages, required an €85 billion Heimlich hug of a bailout from the European Union, otherwise known as Germany and France.
The German public gnashes its teeth at each of these impositions, while German leaders ignore their objections. How long can this untenable political charade go on? How about forever? If not forever, then perhaps until the printing presses Germany uses for her own bonds run out of ink.
The average German is well within his rights to squeal like a stuck pig every time his leaders propose another bailout for the latest “Euro-mess.” But German leaders claim that a common European currency is a crucial German national interest. Germany, a net exporter, has benefited from a steady euro as she ships her products across Europe. If Germany were to replace the euro with a new national currency, she would likely hurt her ability to export to China and other growing nations as her currency would appreciate over time, making those same exports more expensive to foreign buyers. Vocal German business leaders fear this outcome, and they have told Chancellor Angela Merkel as much.
The euro’s demise would be catastrophic for the German banking system. German banks hold hundreds of billions in assets from countries across Europe. If any of these countries were to secede from the currency union, those assets would plummet in price and cause a banking crisis, a prospect that reminds German leaders a little too much of Weimar. According to the Wall Street Journal, Germany, under the auspices of the European Union and the IMF, will have to swallow roughly €12 billion in credit exposure from the Irish government in her latest bailout effort. In return for assuming this risk, the German government believes it has inoculated itself against a deadlier disease: the €186 billion in Irish liabilities festering on the balance sheets of German banks.
But even Germany’s leaders appear to be tiring of their continuing largesse. Chancellor Merkel recently proposed that holders of European sovereign bonds should share in the looming losses soon to result from individual European countries’ inability to straighten out their financial houses. Merkel’s Achtung, Käuser! further spooked already-skittish financial markets. Global bond investors have assumed, despite historical and economic evidence to the contrary, that U.S. and E.U. government bonds are risk-free. While the transnational bondholders will launch p.r. campaigns to extol the sanctity of their investments, Merkel has done a great public service in taking the first intelligent step toward uprooting this moral hazard. Global bond investors have long ignored the credit quality of European sovereign debt in their endless search for yield. They trusted that some combination of submissive Germans, the European Union, and leprechauns carrying pots of gold stood ready to bail them out if a European state were to default on her debts. Merkel’s admonition has caused these speculators to recognize that German generosity is approaching its limit.
Americans should pay close attention to the financial travails of the European Union, for they are hurtling down the same path to financial ruination. The 16-nation eurozone is racking up a budget deficit equal to six percent of the region’s GDP. Total public debts there are a staggering 84 percent of GDP. Americans have scoffed at what they considered the socialist tendencies of one European state after another in the postwar era. But a comparison of the same statistics for the United States should temper any such arrogance: The U.S. budget deficit now exceeds 11 percent of U.S. GDP, while the national debt adds up to 92 percent of GDP. Those irresponsible European leftists!
Germany is riding a tiger while it acts as ringmaster for the monetary circus of the European Union. No intelligent person would ever want to climb on a tiger’s back. But should he ever find himself straddling the beast’s shoulders, he would have even less desire to get off. Germany does not want to bail out her spendthrift cousins forever. But now that she has tied her national fortunes to a bankrupt fiat currency and a system that provides minimal punishment for participants’ budgetary misbehavior, she must either grasp the tiger’s neck even tighter or hop off and run.
On December 10, German Finance Minister Wolfgang Schäuble tried to choke the big cat after he realized he could not outrun it. The 68-year-old conservative alluded to more bailouts, confident that “there will be no domino effect, because we will defend the common currency.” Schäuble seems to have forgotten that tigers don’t meow—they roar. And then they eat you whole.
Greece and Ireland have rattled global financial markets despite German, E.U., and IMF efforts to disguise and delay the widening crisis. Italy, Portugal, and Spain exhibit advanced symptoms of the Greco-Irish flu. But let us not forget: This is only a financial crisis. Or as Schäuble blithely phrased it, “Sometimes it takes a crisis so that Europe moves forward.” The last century of European crises and the millions of corpses they left behind need no enumeration here. Instead, those looking to predict which European banana republic will implode next might best be served by watching Suzanne Pleshette’s 1969 film If It’s Tuesday, This Must Be Belgium. Who knew that Bob Newhart’s sitcom wife was a currency speculator in a previous life?
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