... As the issuer of the euro, only the European Central Bank is in the position of backstopping the eurozone nation’s bond markets, which allows these countries to fund themselves without paying the usurious rates of interest now being demanded for countries such as Greece. The problem is that the ECB is only willing to do so for countries willing to submit themselves to harsh austerity measures as a quid pro quo. This strategy might well save the euro, as it will diminish the markets’ concerns about national solvency. But the cost is likely to be yet even more depressed economic activity, higher unemployment, lower tax revenues, higher social welfare expenditures and, consequently, even higher public deficits. And isn’t that precisely what the Germans in particular most fear?...
... But wait! Germany’s large manufacturers originally bought into the currency union because they felt it would prevent the likes of chronic currency devaluers to use this expedient to grab a higher share of world trade at Germany’s expense. In fact, it is doubly ironic that Germany chastises its neighbors for their “profligacy” but relies on their “living beyond their means” to produce a trade surplus that allow its government to run smaller budget deficits.
The truth is that Germany is structurally reliant on indebtedness and borrowing in other parts of the eurozone in order to grow at all. Over-spending of southern states is the only thing that has allowed Germany’s economy to prosper. It is mindless for Germans to be advocating harsh austerity for the southern states and hacking into their spending potential and not think that it won’t reverberate back onto Germany...
... Now, of course, German Chancellor Angela Merkel may not consciously know all of these things. But it's clear to me that
the political quid pro quo for greater ECB involvement in dealing with Europe's national solvency crisis is German control over the overall fiscal conduct of countries like Greece, Italy, etc. ECB head Mario Draghi is Italian, but he is playing a German game of chicken: he is embracing exactly the strategy that Angela Merkel's political director, Klaus Schuler, laid out to me two weeks ago: holding out for
fiscal union commitments from the weaker "Med" countries, in return for turning the ECB into a lender of last resort. It's high stakes poker, and questions that affect the whole future shape of Europe need to be resolved in a week or so. Obviously this is one reason the Germans felt so comfortable in naming an Italian to the ECB. Trojan horses apparently don’t just come in Greek form these days. A Europe where countries such as Italy and Greece become client states provides a very effective outcome for Germany.
My base view remains that
Europe is headed to a blood in the streets outcome. There is no plan B. The game is to just keep raising taxes and cutting spending even as those actions work to cause deficits to go higher rather than lower. So while the solvency and funding issue is likely to be resolved, the relief rally won't last long as the funding will continue to be conditional to ongoing austerity and negative growth. And the austerity looks likely to not only continue but also to intensify, even as the eurozone has already slipped into recession. From what I can see, there's no chance that the ECB would fund and at the same time mandate the higher deficts needed for a recovery, because the Germans will never allow it. In which case
the only thing that will end the austerity is blood on the streets in sufficient quantity to trigger chaos and a change in governance.
/Thought provoking...
http://www.alternet.org/story/153297/eurozone_catastrophe%3A_how_saving_the_euro_could_mean_blood_on_the_streets?page=1
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