In tomorrow’s Financial Times, one of the major sycophants of ECB and Brussels policy has raised his “voice” in castigating the Germans for being the source of all the EU’s current problems. Martin Wolf’s op-ed piece, “Germany is the Eurozone’s Biggest Problem,” is a criticism of the German export engine. And it seems to be another source for what appears to be a concerted effort to challenge Berlin’s intransigence over the need for budget austerity before fiscal stimulus. Wolf’s opening salvo against the Germans: “The financial crisis has given it a dominant voice in eurozone affairs. This is a matter of might, not right. Creditor’s interests are important. But they are partial, not general interests.”
My response to this is that Mr. Wolf sets up a straw man with this argument. The Germans MIGHT have evolved because without them GUARANTEEING the promises of President Draghi’s “whatever it takes” campaign to maintain the existence of the EURO, the entire EU project would have collapsed under the weight of its highly questionable ability to honor the debt of what at the time was referred to as the PIIGS: Portugal, Italy, Ireland, Greece, Spain.
Yes, a default by the PIIGS would have caused severe stress in the German banks that owned vast amounts of European sovereign debts but Germany would have been able to resolve its banks through it savings, similar to what Japan’s authorities were able to do for the last two decades. Wolf argues that the German’s would rather have deflation then negative rates but, “a deflationary spiral would be a much bigger threat than negative interest rates.” The largest creditors would always desire deflation or very low inflation so as not to debase the assets they own. While negative real yields reward debtors the effects of NIRP has a devastating effect on a creditor. Wolf continues: “Above all, the eurozone will fail if it is run for the benefit of creditors alone.” What Wolf is forced to come to terms with is that the flawed EU system creates an untenable operation for the divergent needs of its members. The only way out is for the German populace to vote on the entire EU project because the confiscatory policies of the ECB result in TAXATION WITHOUT REPRESENTATION.
If the German’s cannot accept the expropriation of its wealth Wolf maintains, “… they should use their exit option. To do so would also entail accepting great short-term disruption.” If Wolf believes that a German exit would result in a short-term disruption he is truly Mister Fantasy for the repricing of European debt without a German guarantee would be a calamity for European debt markets and probably all global financial markets. Especially so as the ECB begins its purchases of corporate bonds next month. A short-term disruption is a pipe dream.
Dear Mister Fantasy, play us a tuneSomething to make us all happyDo anything,take us out of this gloomSing a song, play guitar, make it snappyYou are the one who can make us all laughBut doing that you break out in tearsPlease don’t be sad if it was a straight mind you hadWe wouldn’t have known you all these years. (Traffic)