Wednesday, 7 December 2011

If only the Germans...

More and more I'm coming across articles, or comments to articles, that essentially say, "in the short term, everything would be fine if only the Germans would backstop all the peripheral European debt", as though that were some kind of rational thing for the Germans to do. Usually such people are either hopeless lefties / Keynesians (essentially indistinguishable in this case), which goes some way to explaining why I see them more in comments to articles rather than in the articles themselves, or they are academics and no one really expects what they say to make very much sense in the real world (one is reminded of that Baudelaire poem about seagulls: Ses ailes de gĂ©ant l'empĂȘchent de marcher).

Now the short term, like the poor, will always be with you — but eventually the medium and long terms really do arrive! (Incidentally, why do Keynesians always love to justify their position by making that quote, you know the one: "In the long run, we are all dead"? Have none of them realised that KEYNES HAS BEEN DEAD FOR SIXTY-ODD YEARS?) It does no one any good, when the long run is hammering at your door with every sign of breaking it down, to continue to bleat that it would be more convenient to do something else in the short term.

The real reason that the Germans aren't going to guarantee peripheral European debt (unless Angela Merkel goes criminally irresponsible on them) is because they can think past the next sentence. Let's see how that thought process might go shall we? 1) the markets are going crazy because they think that the peripheral countries are likely to default, therefore 2) we should guarantee their debt ... and ... ? At this point, it's obvious that the commenter thinks that the peripheral countries will eventually pay the Germans back, at least that's the most charitable interpretation I can come up with. But if that were the case, the markets wouldn't be worried about it, at least not to the same degree. So what these people are really saying is that the Germans should guarantee the debt, so that it's Germany who'll be left shouldering the costs of the default and not the markets.

Because, and let's be clear about this, what would Germany get from the peripheral countries in return for their backstopping the debt? Promises of reform? Promises to do better in future? Well these countries are all still running current account deficits, they are already broke in fact if not in law, and they are only getting more broke. And they have already made promises, lots of them: that's what their bonds are, promises. And if they default, their promises literally aren't worth the paper they are written on.

As the calls for Germany to guarantee peripheral debt grow, so does my gut rumble that it may be Germany, not the peripheral countries, that exits the Euro.

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