Mildly distracted from the sound of falling ramparts in the Old Countries by our current domestic reality crisis, we still take note that the European Central Bank has announced that it will — surprise — finally begin directly buying sovereign debt from troubled issuers. ZZZZzzzzzzzzzzz…..
WAKE UP! Behind this dry, dull jargon is a very scary message indeed: European citizens in general are now being taxed to pay the specific bills of the Greeks, and possibly the Italians and the Spanish, whose colossal spending spree was financed not by their own economic growth, but by these very bonds. Who gets the bills? The bond buyers would, if the bonds defaulted. But they aren’t going to default. Instead, the European Central Bank will take money given it by Germans, French and other solvent EU members, and use it it to purchase enough bonds from potential defaulters to keep their interest rate levels down to a manageable level.
This is called “monetizing the debt,” and is generally considered to be in the same league as counterfeiting. In effect, this practice induces a de facto currency devaluation that has the same effect as a direct tax on savings. Oh, yes — that’s exactly what we are doing in this country, but so far, the Europeans have managed to avoid it. One supposes there is a critical mass in bureaucracy that finally triggers a kind of Gothic indifference to responsibility, and the European Union has finally achieved it. But Americans can be proud. We beat them to it by a sizable margin some time ago.
Okay. Why not just let the Greek bonds default? Some history is in order here, with a bias perhaps missing from The Economist’s reports, and a few items not generally commented on at all.
Default would be even worse. We — they — are past that now. If the Greeks defaulted, the Germans and the French would still be left holding the bag, because — ahem — guess who holds most of the Greek bonds? French and German banks. In fact, at a certain point, when Mssr. Sarkozy and Frau Merckel began making noises that “the bondholders should take a haircut,” i.e., take it on the chin and lose their shirts, the banks, very quietly and diplomatically, as they tend to be in Europe, said to them:
“Go fuck yourselves. You told us we had to buy this shit, and you would make sure the damn Greeks got enough cash to make them good. We’re not going to be left holding the bag.” So much for the default/haircut option.
“Oh, come on,” you might say. “Why do you think the German and French banks were jawboned by their governments to buy Greek bonds?” Hmmm…how many Greek bonds does, um, JP Morgan Chase hold? Citibank? BofA? Morgan Stanley? Well, maybe they were just much smarter than Deutsche Bank. I guess.
Another option floated — and still very much a possibility — is the notion of a “true Eurobond.” In practice, the only thing true about it is its horror: here, Greece or other troubled debtors could issue bonds denominated in Euros and backed by the credit of the entire EU. This is a lot like your deadbeat brother-in-law getting his hands on your credit cards. While it would certainly lower the interest levels that debtors would have to pay, it would also put the sober, responsible citizens of less carefree nations in a kind of jeopardy they have not experienced since the days of the Third Reich, and while the irony might strike some as fitting, at least where the Germans are concerned, this does not increase the appetite of future pensioners for the prospect.
So for pow, the ECB has yielded to the only default-free option they have, and the winners are: not the Greeks. Oh, sure, they got to have their party, but it’s over now. And pretty much over for good — it will be some time before anyone extends the Greeks credit except on the most restrictive and confining terms, and at significant interest rate premiums. They are in the shit for real and for a long, long time. Okay, then the German and French banks? Hardly. They will have to make some concessions on their holdings, at the very least extending the maturities and thereby holding illiquid paper for much longer than they’d like. Well, then, who?
When this whole idea of European Union was first floated — and then its ugly stepchild, currency union, became the law of the land (except in Britannia, which still harbors grave suspicions about French and German promissory notes) — we could not help wondering what in reality this notion would accomplish. Lofty goals were imputed: open borders and free commerce would lower the cost of goods and services to consumers and decrease the costs of suppliers, introducing an “everybody wins” free lunch. Open borders would also encourage a greater parity in labor, enabling the serfs of the “south” (Portugal, Spain, Greece, Italy) to climb closer to the earnings levels of their wealthier northern counterparts.
Some of this happened, albeit not quite as expected. For some reason, the rich got richer, and, while the poor also got richer, it appears now that they did so largely on credit, and now that the bill is due, the richer are about to get poorer, which somehow seems to make some kind of weird Euro-sense. Yet, there is a social class that has not only escaped this confluence of calamity, but has prospered. They, of course, are the bureaucrats. With European union came whole new herds of these uniquely parasitical critters, replete with bizarre rituals and a closed shop. Nor did the purely national stripe of bureaucrat suffer any loss of suzerainty; their power increased, as did their budgets, with their broadened reaches into the affairs of others, made possible through the miracle of “union,” which, among other things, has a strong if oblique sexual connotation ultimately justified by the screwing the “European” citizens are now taking.
So the Europeans will match the US dollar for euro in debasing their currency by printing as much of it as they care to in order to shore up their rotting infrastructure of moldy debt, giving the Krugmans of this world cause to point and say “what inflation?” After all, the dollar and the euro, its only real competitor as a reserve currency, remain within recent historical bands. But — please don’t look at the Swiss franc — which has quietly crept up from $0.80 to about $1.30 — a 60% gain — over the past couple years. (I will not attempt to inflame Mr. Krugman’s passion by mentioning the gold price.)
What does the future hold? Europe cannot afford to maintain the fiction of a common economic interest, and therefore a currency. Currency union will dissolve. The bureaucrats will fight it tooth and nail. But I have faith in the Europeans themselves, and if common sense prevails, the common currency will not.