In July of 1914, Germany was presented with an unpalatable historic choice: whether to force its only ally, Austria, to back down in the face of intolerable provocation by nasty little Serbia; or, to enter into a world war against Russia, France and Britain. To choose the former would send the signal that the Central Powers lacked the will or the means to defend their legitimate rights; to choose the latter was to risk a prolonged bloody war and unforeseen consequences. Having to choose between honor and dishonor, Germany chose honor, and paid a heavy price.
A century later, Germany is faced with another Hobson’s choice: whether to jeopardize everything that she has achieved since the war in terms of wealth, prosperity and sound money by handing over its credit card to the eurozone; or, to stand by and watch as the eurozone collapses into chaos.
I do not envy them that choice. As bystanders, we (Americans) should hope that Germany “does the sporting thing” and hands over its credit card. This would prevent a global depression (with unforeseen consequences). It would be very costly and humiliating for Germany, but everyone would be better off in the end.
But to argue blithely that the Germans should be good citizens and just write the big check ignores a century of German history. Germany was not treated very well by the first half of the 20th century. In 1945 her country was a pile of rubble, cut in half by the victorious powers, deeply humiliated, roundly hated by everyone, indeed viewed by Europe as a criminal people.
What did the beastly Hun do then? They became Europe’s model nation: open, free, democratic, peaceful, and rich. They have done no harm to anyone since 1945. They have expiated their sins, they have paid their dues. They have embraced Europe and subsidized it for decades. There is nothing they could have done that they haven’t done to pay for their sins.
And now, having proven that they are good and can be trusted, they are being asked to pay some more, a lot more, a blank check. Because they are guilty, because they are Germans. They are being called Nazis in Greece because they aren’t donating fast enough for the tastes of the marxist unions.
It is true that, in a purely rational analysis, Germany would be better off if she paid the bill. But leaving rational calculation aside, why should she? Because she will never have to stop paying blackmail? Because her citizens won’t be welcome on Greek beaches? This is asking a lot to ask of a proud people with a lot to be proud about.
Europe wants three things from the Germans: their money, their credit, and their currency. They want Germany to keep funding the bailouts despite noncompliance with the agreed terms. They want Germany to give them its credit rating (without any control) so that they can all borrow as much as they wish. They want Germany to abrogate the treaty establishing the ECB, to allow it to become the piggy bank for eurozone governments.
In today’s Le Monde, Bundesbank president Jens Weidmann pushes back very hard on these arguments:
“The pooling of debt is just one side of a coin where federalism is the other. Governments who are in favour (of eurobonds) fail to point this out,” German central bank head Jens Weidmann told the French daily Le Monde in an interview. “In those countries which are calling for eurobonds, France included, there is no public debate or public support for the transfer of sovereignty that that would entail. But it's precisely this debate we should be having,” Weidmann said.
France's new President Francois Hollande is spearheading a drive for eurobonds, in effect pooling the debt of eurozone countries, in order to raise fresh debt funding. But Germany is firmly opposed to such a move, arguing it takes away the pressure for reform in spendthrift countries and also undermines market discipline. In contrast, France and some other eurozone states say that eurobonds could fund desperately needed growth policies after years of austerity have pushed the economy into recession.
“It is illusory to believe that eurobonds would resolve the current crisis,” Weidmann continued. Common bonds “can only come at the end of a long process, which, among others, would require several states to change their constitution, modification of treaties and the creation of more of a budgetary union,” he said. “You don't give your credit card to someone who can't keep their spending under control,” Weidmann added.
So at present we have the German chancellor saying no to eurobonds, and we have the German central bank saying no to eurobonds (and no to further ECB emergency lending).
In the London Sunday Times, Niall Ferguson argues that Germany will ultimately capitulate to the logic of federalism and eurobonds. I think that they are more likely to continue to say what they have been saying: that individual countries, if they wish to obtain assistance from the EU and the ECB, must cut their spending, reform their economies, balance their budgets and recapitalize their banks. I see little evidence that this position will be reversed, no matter how hard Francois Hollande stamps his feet.
If I am right, that means that the world will soon experience a global financial crisis on a scale not seen since 1929-33. In my next post, I will try to sketch out how I would see such a crisis play out.