Friday, December 2, 2011

Germany Says 'Nein' To Facile Eurozone Solutions

The rest of the world seems to be blaming Germany for the failure to solve the debt crisis in the Eurozone.  Easy, they all say, just let the European Central Bank be the 'lender of last resort' and print money.

Germany Destroyed After WWII
But Germany is saying 'Nein' to that, for the reasons explained below.  And frankly, I applaud Germany for their refusal to take the 'easy and broad road that leads to destruction'.  They know very well what total physical and financial collapse looks and feels like, which is one of the reasons that they understand that sometimes there are no shortcuts to economic wellbeing. 

And they believe that printing money to solve a debt crisis is a slippery slope leading nowhere good.  Instead, they recommend doing the hard but responsible things that lead ultimately to a better life.

Thank you, Germany, for the being the adult in the room.

A writer for Salon, Siobhan Dowling, explains the situation quite accurately.
So is Germany’s refusal really absurd, as The Times suggests? What exactly are its leaders thinking?

Analysts say that firing up the ECB’s printing presses to solve the crisis is something that goes deeply against the grain here. Instead Germany has been pushing austerity on indebted countries and calling for closer coordination of the euro zone’s spending and budget policies and tough sanctions on those who break the rules.

Some experts say Chancellor Angela Merkel is simply playing hardball, holding out on the issues of the ECB and eurobonds in exchange for concessions.

“Mrs. Merkel’s position has been to use the pressure that is exerted by the markets to help push countries that have budget or generally public finance problems towards a much stronger reform drive,” said Timo Klein, senior economist with IHS Global Insight. He adds that she is using that same pressure to try to make changes in the EU treaties to allow for greater budget supervision. “Obviously this is a high risk strategy,” he adds.

But Berlin also disagrees with its foreign detractors regarding the wisdom of using the ECB as a lender of last resort. “If this were to be seen as a standard procedure in future — that the ECB would be obliged to buy up large quantities of government bonds — then that is nothing else than monetizing that debt, and then before long you will have noticeable increases in inflation,” Klein said. (Printing currency essentially means that more money is chasing the same goods, which drives up prices.)

Inflation is profoundly worrying to Germans, due to the traumatic experience of hyperinflation in the early 1920s, when the personal assets of the majority of the population were wiped out. “That fear is so deeply ingrained, almost 90 years on, this is still very much present on people’s minds,” Klein said.

“Germans are probably more inflation averse then people in other countries,” said Sebastian Dullien, professor of international economics at Berlin’s HTW University. But he adds that they have become more concerned with inflation recently than they were between World War II and reunification, even though inflation was actually higher then. One possible explanation, he says, is that wages have stagnated in Germany, meaning that even slight inflation eats into people’s spending power more.

Moreover, where other see a necessary bailout, Germans see a handout to countries that are living beyond their means. They regard this as letting them off the hook for their profligate ways. Berlin is convinced that only by imposing stringent sanctions on these debt sinners will they enact reforms. It also sees this as the best way to win back market confidence.

This is a view many German economists share. “In Germany there is this feeling that if you just cut spending strongly enough then confidence will return and you will have more investment,” Dullien said. He points out, however, that market panics show that financial markets are not always efficient and don’t always process information adequately.

Nevertheless the thinking in Germany is that inflationary policies are wrong-headed in that they might cover up the cracks but don’t address the real issues.

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