AMERICAN FUTURE

From Spiegel Online:

Business daily Financial Times Deutschland writes that the summit took some historically important decisions.

“It made it possible to decouple banking risks from the state risks. Ailing banks like those in Spain that need recapitalizing should no longer pull into the abyss the governments that support them and are finding the bailout increasingly hard to finance. Merkel gave in on this issue. She caved in, some German commentators are saying. If that is so, then she caved in cleverly. The compromise was necessary and sensible. The risk decoupling won’t just lead to a short-term calming of markets and end the famous ‘death spiral.’ It will also give governments enough time to structurally strengthen Europe against new crises.”

“But this summit agreement has a flaw too. The chancellor insisted on a functioning European banking supervisory authority being established first. Europe will again lose time as a result. Setting one up isn’t a matter of just a few weeks. The chancellor’s demand is justified. But it will tempt the Spanish government to delay the necessary banking consolidation. Why should it help banks now if it has to accept conditions and yield increases that it would be spared at a later date? Madrid’s delaying tactics are dangerous and only increase the danger of a euro exit.”

Conservative Frankfurter Allgemeine Zeitung writes:

“German Chancellor Merkel has largely herself to blame for being labelled as the loser of the EU summit by the opposition in the parliamentary vote on the ESM bailout fund. Her offhand remark ‘as long as I live’ following the statement that there would be no ‘total debt liability’ in the euro zone created the impression that the German position in the Brussels negotiations would be set in stone. But it’s the nature of negotiations, especially in the EU, that everyone involved makes concessions from their initial positions in order to reach a compromise. That also applies to Germany, even though it is the supporting pillar of the currency union.”

“The tactical ploys used to reach compromises are a different matter. Frau Merkel was blackmailed pretty brutally by politicians from the south who share fundamental long-term German principles, by the Italian Monti and the Spaniard Rajoy (with support from the Frenchman Hollande), because these countries need swift aid. It will soon become clear if the new Brussels agreement will achieve that. But it’s certain that these blackmail tactics will leave marks. Relations between Paris and Berlin in particular are severely strained. President Hollande will get a sense of that at the next opportunity.”

Conservative Die Welt writes:

“At the latest EU summit Germany — again — agreed to a lot of solidarity without getting much control in return. There is a big danger that the euro zone will get into an ever deeper imbalance as a result. If ailing economies can get at the money of solid states more easily, this will inevitably strengthen the opponents of a rigorous reform program in those countries. Rome and Madrid are unlikely to find it difficult to decide whether they would rather burden their citizens and their children and grandchildren or the German taxpayer. And Germany won’t even have a veto right in the permanent rescue fund in future because qualified majorities will suffice for aid. It remains to be seen whether the euro will survive the institutionalized irresponsibility.”

Left-wing Die Tageszeitung writes:

“It was an unsual image: Angela Merkel as the loser. She had to back down in Brussels. The ESM will dole out loans to crisis nations without imposing tough austerity. After Merkel’s vow to fight forever against mutualized debt in the EU, that didn’t look so good. The apparent defeat in Brussels is nothing new. It fits seamlessly into Merkel’s strategy – or rather, her pattern of reaction — since the euro crisis started. She always said no, only to abandon each no when it became opportune to do so.”

“Merkel followed a political cost-benefit calculation. A German victory in Brussels over an Italian technocrat government being crushed by interest rate burdens would have been more expensive than this defeat. An EU summit without a result would have brought the euro’s implosion dramatically closer. But Germany already won in the EU long ago. Berlin has europeanized the German economic model by imposing the fiscal pact. The price will be paid by less export-focused nations being forced into rigid austerity. And things look good for Merkel in Berlin too. Effectively, she’s governing not with a center-right government but with a grand coalition of conservatives, Greens and center-left Social Democrats. The liberals (the pro-business Free Democratic Party, junior partner in the center-right coalition) are allowed to complain a bit. Meanwhile, the Social Democrats are bravely trying to persuade themselves that they won’t be her junior partner again in 2013 (the next general election is scheduled for 2013. The SPD was the junior partner in a so-called grand coalition wit Merkel’s conservatives from 2005 until 2009).”

On the same day that IMF Chief Lagarde warned that dangerous cycles “are now threatening the very existence of the European project,” two notable (political) economists — Niall Ferguson and Nouriel Roubini — have penned a call to action in the Financial Times. In “Berlin is ignoring the lessons of the 1930s,” they say that

We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis [which began the collapse of Austria's Kreditanstalt] two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent.

Later, Ferguson and Roubini add that

Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union. If they are still not convinced, they must understand that the costs of a eurozone break-up would be astronomically high – for themselves as much as anyone.

After all, Germany’s prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old Deutschmark would have. And the rest of the eurozone remains the destination for 42 per cent of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.

It is unlikely to be a coincidence that Lagarde’s, Ferguson’s and Roubini’s utterances come on the same day as President Obama’s first-ever Eurozone-focused press conference.

Something is happening or will soon happen. Time is getting short. Seemingly everyone except the Germans has concluded that German policy is leading to a European economic collapse.

“I fear that austerity without end will bring about a return to the unstable populist politics the European Union was designed to prevent. That could shatter the eurozone and, with it, the EU, thereby ending the most successful attempt to build peace and prosperity in Europe since the fall of the Roman Empire. Moreover, it is clear – and has long been so – that the responsibility for preventing that outcome rests on Germany, Europe’s central power, in every sense. As Charles Kindleberger argued, in a panic, the creditworthy country has to lend freely if a fixed exchange rate system (or in this case a currency union) is to survive.

It is often forgotten, not least in Germany, that the rise of Adolf Hitler to power was preceded not by the great inflation, which occurred a decade before, but by the great depression and the austerity of Heinrich Brüning, in response. Thus, votes for the Nazi party jumped from a relatively insignificant 810,000 in 1928, to 6.4m in 1930, and 13.7m in July 1932. Deep economic collapses are dangerous.

Deep economic collapses are very dangerous. Mr Schuknecht, with his emphasis on the long term, completely ignores these dangers.  If trying to avoid such a dire outcome is “short-termism”, so be it. I think of it as trying to find a practical exit from the current trap. Without it, the eurozone may never reach the long term.

Fiat justitia, et pereat mundus (let justice be done, even if the world perishes) is a dangerous motto.”

The above quote is from Martin Wolf’s reply to Ludger Schuknecht, the Director General of the German Ministry of Finance. Herr Schuknecht took strong exception to a recent column (“The riddle of German self-interest“) by Mr. Wolf.

Regarding populist politics — of the right-wing variety, this article in the FT is a warning of what may become a more commonplace occurrence.

“Those who don’t know history are destined to repeat it.”

– Edmund Burke (1729-1797)

“Those who cannot remember the past are condemned to repeat it.”

–George Santayana (1863-1952)

In addition to illustrating the financial version of the Golden Rule — that those with the gold make the rules — the German government’s insistence that austerity is the only way that the health of the Eurozone’s economically-troubled members can be restored shows that knowledge of the past doesn’t prevent it from being repeated.

When World War I ended, the victorious Allies imposed a Carthaginian peace on Germany. The Versailles Treaty milked Germany dry. Unable to make its reparation payments, the government of the Weimar Republic resorted to the printing press. The hyperinflation of 1923 destroyed the savings of the middle class. Loans from American banks — a stop-gap measure analogous to credits now being issued through the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) — restored economic and political stability for five years. In 1928, the Germany economy started to contract. Soon after the 1929 Wall Street crash, risk-averse American bankers stopped bankrolling Germany. The German economy crumbled, accelerating the worldwide economic crisis. And setting the stage for Hitler.

The lesson from this admittedly sketchy depiction of a tragic episode in world history is that victors (militarily or economically) that impose harsh austerity on losers ultimately pay a heavy price. Unfortunately, this isn’t the lesson that the Merkel Government and the majority of the German people have taken to heart. Instead, fear of inflation has been embedded in the German DNA. They know their history, but they’ve drawn the wrong lesson from it.

The export-heavy German economy is outperforming other mature economies, but for how long? If the German belief in and enforcement of austerity persists, the economies of its Eurozone trading partners — led by Greece — will fall deeper and deeper into an economic quagmire. As this happens — and whether or not the currency union survives — exports will plunge, resulting in a German economic contraction. Carthaginian austerity will undermine its author.

“Its neighbors may be suffering, but the euro crisis has created conditions that actually benefit the German economy. Not only is the government enjoying the windfall of negative interest rates on bonds, but unemployment is down and exports are booming.”

– Spiegel Online, January 10, 2012

This may be Germany’s 1999. If you’re too young to remember (I don’t know the demographics of my readership, such as it is), that was when the U.S. economy and stock market were booming and (nearly) everyone thought the good times would last forever. Rampant hubris was the order of the day. The Economic Report of the President, issued in February 2000, began this way:

Today, the American economy is stronger than ever. We are on the brink of marking the longest economic expansion in our Nation’s history. More than 20 million new jobs have been created since Vice President Gore and I took office in January 1993. We now have the lowest unemployment rate in 30 years—even as core inflation has reached its lowest level since 1965.

This expansion has been both deep and broad, reaching Americans of all races, ethnicities, and income levels. African American unemployment and poverty are at their lowest levels on record. Hispanic unemployment is likewise the lowest on record, and poverty among Hispanics is at its lowest level since 1979. A long-running trend of rising income inequality has been halted in the last 7 years. From 1993 to 1998, families at the bottom of the income distribution have enjoyed the same strong income growth as workers at the top.

In 1999 we had the largest dollar surplus in the Federal budget on record and the largest in proportion to our economy since 1951. We are on course to achieve more budget surpluses for many years to come. We have used this unique opportunity to make the right choices for the future: over the past 2 years, America has paid down $140 billion in debt held by the public. With my plan to continue to pay down the debt, we are now on track to eliminate the Nation’s publicly held debt by 2013. Our fiscal discipline has paid off in lower interest rates, higher private investment, and stronger productivity growth.

These economic successes have not been achieved by accident. They rest on the three pillars of the economic strategy that the Vice President and I laid out when we took office: fiscal discipline to help reduce interest rates and spur business investment; investing in education, health care, and science and technology to meet the challenges of the 21st century; and opening foreign markets so that American workers have a fair chance to compete abroad. As a result, the American economy is not only strong today; it is well positioned to continue to expand and to widen the circle of opportunity for more Americans.

These words were written only 12 years ago. One month after they were penned, the stock market peaked and soon thereafter the economy entered a recession. A very different future — one that was in most every respect the exact opposite — eventuated.

Now, it’s Germany’s — or, at least, Der Spiegel’s — turn. In “Europe’s Crisis Is Germany’s Blessing,” the most important German news magazine says this:

It’s every debtor’s dream. When asked for a loan, the bank not only agrees, but actually pays the borrower for their patronage. It sounds like a fairy tale, as though the laws of the market economy had been suspended. But on Monday it really happened.

The debtor in this case was the German government, which borrowed €3.9 billion ($5 billion) for the next six months at the unbelievable interest rate of -0.01 percent. Even the German Finance Agency was stunned. “This has never happened before,” a spokesperson said. The Finance Ministry should be pleased. In the last four years, they’ve had to shell out around 1.8 percent in interest for such bonds. But recently even interest rates on German bonds with longer maturities have decreased significantly. The federal government is saving a bundle.

The reason for the windfall? Amid the ongoing euro crisis, Germany is one of the few borrowers that are still regarded as a safe haven. Many investors would rather lend the government money at bargain-basement rates than risk losses.

Half of Europe Suffers While Germany Profits

Other countries can only fantasize about such a bonanza. Italy is currently being forced to pay record interest rates of some 7 percent on 10-year government bonds because investors lack confidence in the government in Rome. Questions remain over whether Prime Minister Mario Monti will succeed in reducing the government’s €1.9 trillion mountain of debt without stifling the economy. Meanwhile bond yields in crisis-stricken countries like Spain and Ireland have also risen sharply.

It has become a rule of the euro crisis: While a number of euro-zone countries suffer, Germany profits. The crisis may slow economic growth in Germany, but there are also a raft of crisis-related mechanisms that help the country profit at the expense of other nations. As long as a big euro-zone crash doesn’t materialize, this cushions the effects of the downturn for Germany.

A recent projection by the Munich-based Ifo Institute for Economic Research found that the economies of France, Spain, Italy, Belgium, Greece, Portugal and Cyprus would likely shrink in 2012. The German economy, on the other hand, is still expected to grow by 0.4 percent this year.

The imbalance between Germany and many other euro-zone countries is most apparent on the job market, though. Euro-zone unemployment now averages 10.3 percent, but in Germany the figure sank to 7.1 percent for 2011. Last year, just under 3 million unemployed people were registered out of 82 million residents in Germany. By contrast, the number of unemployed in Spain recently reached 4.42 million out of just 45 million residents.

German Firms Profit from Weak Euro

As mass protests form in Spain due to high unemployment among young people, Germany is benefiting from an influx of new skilled professionals. An increasing number of southern Europeans looking for work are heading north to prosperous Germany. The number of Greek immigrants rose by 84 percent in the first half of 2011 to reach some 4,100 people, according to the Federal Statistical Office. The total number of immigrants rose by 19 percent year-on-year for that time period, reaching 435,000.

But that’s not all. Indirectly, Germany also profits from a simple symptom of the crisis — the weak euro, which has fallen to about $1.27, its lowest value since Sept. 2010. For German companies, the sinking euro acts as a kind of crisis buffer. While it reduces demand for German products within the euro zone, these make up only around 40 percent of the country’s exports. But for the rest of the world, a weak euro means cheaper German products, which means they’re more competitive.

Indeed, German exports grew by 2.5 percent month-on-month in November, reaching €94.9 billion. Compared to a year earlier, exports were up by an impressive 8.3 percent. The crisis notwithstanding, exports for 2011 as a whole surpassed the historic trillion-euro level, a benchmark not even reached during the boom year of 2008.

Those with the gold make the rules. Within the eurozone, Germany has the gold. Why change the rules when the status quo is just fine?

If you’re trying to understand why Germany is dead-set against eurobonds and other porposed solutions to the eurozone crisis, look no further than this:

The starkly contrasting economic trajectories of countries inside the eurozone were highlighted on Tuesday as Germany reported unemployment at 20-year lows while Spanish jobless figures rose for the fifth consecutive month.

The number of Spanish jobseekers rose to 4.42m, while Germany’s jobless count fell to 2.976m. Another measure, based on household surveys, puts Spanish seasonally adjusted unemployment at 5.4m, nearly 23 per cent of the workforce. The comparable German figure decreased to 6.8 per cent in December from 6.9 per cent the prior month.
And this:

The German car makers’ association said on Tuesday that 3.2m new cars had been registered in Germany in 2011, 9 per cent more than the year before, with domestic brands beating foreign rivals.

In greater detail, here’s the German employment situation:

German unemployment dropped markedly in December, bringing the number of out-of-work in the eurozone’s largest economy to a 20-year low . . . Unemployment fell by 22,000 in an unusually warm month, rendering an adjusted jobless rate of 6.8 per cent, down from 6.9 per cent in November.

German companies are profiting from solid order books, with demand for their goods increasingly coming from domestic consumers and companies as well as foreign ones.

Economists said the positive labour-market trend could continue over the next few months as companies were still willing to take on more staff – carmaker Audi said it would hire about 1,200 extra workers in Germany this year.

Other manufacturing companies were said to have shortened their traditional Christmas production break to work off their order backlog, and numerous sectors have been reporting many open positions in the past months.

But in Spain it’s austerity, not employment, that’s growing:

The . . . government has already announced €15bn of emergency public spending cuts and tax rises after announcing that the 2011 budget deficit could exceed 8 per cent of gross domestic product – two percentage points higher than the 6 per cent target agreed by the previous Socialist government with the EU.

The employment ministry statistics show that the jobless total has more than doubled since mid-2007 . . .

Evidently, the Germans have convinced themselves that their economy isn’t dependent on the economic health of the other members of the eurozone. If and when the Germans begin to listen to the advice of others, it will be a signal that the Merkel government has started to anticipate an economic slowdown.

Across the continent, European leaders warned that 2012 was likely to be tougher than 2011.

Germany:

Angela Merkel told German voters “next year will no doubt be more difficult than 2011.” In her televised address, she said Europe was experiencing its “harshest test in decades” but would ultimately be made stronger by the crisis.

France:

In a sombre address on national television Nicolas Sarkozy said “This extraordinary crisis, without doubt the gravest since the second world war, is not over … you are ending the year more anxious for yourselves and your children.”

Italy:

Prime Minister Mario Monti said in his end-of-year address last week that Italy had hauled itself back from the “edge of the precipice” but he said more needed to be done to reform labor markets and the service sector to restore competitiveness to the stalling economy. President Giorgio Napolitano urged Italians to make sacrifices to rescue the country’s public finances. “Sacrifices are necessary to ensure the future of young people, it’s our objective and a commitment we cannot avoid. No one, no social group, can today avoid the commitment to contribute to the clean-up of public finances in order to prevent the financial collapse of Italy.”

This time, it raise a caution flag for the EFSF:

The ‘AAA’ rating on debt issues of the European Financial Stability Facility (EFSF) largely depends on France and Germany retaining their ‘AAA’ status. The revision of the rating Outlook on France to Negative last Friday implies that the risk of a downgrade of EFSF debt has increased.

We affirmed France’s ‘AAA’ status but warned that that there is a slightly greater than 50% chance of a downgrade within the next year or two. This is therefore also the case for the ‘AAA’ ratings assigned to the EFSF’s debt issues, unless additional credit enhancement mechanisms are introduced.

The ‘AAA’ ratings assigned to EFSF debt issues rely on the EUR726bn of irrevocable and unconditional guarantees provided by the euro member states, and on the conservative guidelines the EFSF sets itself regarding debt management and liquidity risk.

Of the guarantees and over-guarantees from ‘AAA’ rated member states, France and Germany provide EUR369.6bn, or over 80%. Although the EFSF could potentially remedy a downgrade of a small ‘AAA’ guarantor by increasing the size of its cash reserve or through additional credit enhancements, this would be far more challenging if a larger guarantor like France or Germany were downgraded. The primary source of ratings risk for EFSF debt issues is therefore the possibility that one or more of its largest ‘AAA’ guarantors is downgraded.

Because we do not assign Outlooks to the ratings of individual debt issues, but rather to our issuer ratings, the change in the French issuer rating Outlook cannot immediately be reflected in changes to our assessment of EFSF debt issues. We rate EFSF debt issues but not the EFSF itself, as it is the former rather than the latter that benefit from sovereign guarantees.

Under the amended Framework Agreement announced at the EU summit on 21 July, ‘AAA’ rated euro member states provide EUR451.5bn of guarantees and over-guarantees, giving the EFSF a maximum lending capacity of EUR440bn.

France is the most exposed of the ‘AAA’ euro member states to a further intensification of the eurozone sovereign debt crisis. It provides EUR158.5bn of guarantees plus over-guarantees to the EFSF guarantee pool under the framework agreement.

When we revised France’s rating Outlook, we noted that an increased likelihood that contingent liabilities arising from the crisis will be crystallised onto France’s balance sheet, material slippage from fiscal targets, and a re-assessment of France’s economic growth potential, could each trigger a rating downgrade. Conversely, economic and fiscal performance in line with our base case expectations, along with a resolution of the eurozone debt crisis, would be likely to result in a revision of the Outlook to Stable.

Note: TARGET2 is the eurozone’s central banking payments system.

In this article, the BBC’s business editor explains — in terms that people without a PhD in central banking can understand —  how German taxpayers are propping up Italy (and other troubled eurozone members). Think of it as a brief course in Central Banking 101.

TARGET2 allows cross-border payments to be made within the eurozone. When money moves from an Italian bank to a German bank, for example, the account of that Italian bank at the Bank of Italy (the Italian central bank) registers a debit and the account of the German bank at the Bundesbank (the German central bank) registers a credit.

All of which is just a mundane description of what is necessary in a technical sense to create a monetary union for 17 European countries which hitherto had their own currencies, and retain their own banking systems and central banks.

But here’s the thing. As the eurozone has evolved, especially in recent months, there has been a rather striking increase in the credits at the Bundesbank, and in credits at the central banks of other eurozone nations whose finances are perceived to be strong, such as Luxembourg, the Netherlands and Finland.

These positive balances at the central banks of the saving and exporting economies corresponds with growing negative balances at the central banks in weaker economies, notably Italy, Greece, Ireland, Spain and Portugal.

Broadly, what this means is that the central banks of the economies with bigger debts owe a colossal amount to the German central bank.

So, for example, in August of this year the TARGET2 net positive balance for Germany was 390bn euros, up by more than 60bn euros in three months. And the negative balance for Italy was 57bn euros, which represents a deterioration of more than 70bn euros over the same period (according to an analysis by Deutsche Bank).

Now some of this swing may have stemmed from German-based lenders to the Italian government wanting their money back, when Italian government bonds fell due for repayment. And in order to repay them, the Italian government would have sold new bonds to the Italian banks.

The repayment of the German creditors would then have taken place through the TARGET2 system, creating a debit at the Bank of Italy and a credit at the Bundesbank. And the Italian commercial banks would almost certainly have dumped their new holdings of Italian government bonds on the European Central Bank as collateral for loans from the ECB.

So there has been rising exposure to the Italian state of both the European Central Bank, through loans to Italian banks, and of the Bundesbank, through the TARGET2 payments system.

What’s more, in the past couple of years similar trends have been observable in Greece, Portugal, Ireland and Spain, with their banks and public sectors becoming more financially dependent on the ECB and the Bundesbank: according to Deutsche Bank, the TARGET2 liabilities of the Greek central bank was 91bn euros in July.

Now it is a pretty good bet that the TARGET2 positive balance of the Bundesbank has risen very sharply in the past six weeks, while the negative balances of Italy, Greece and so on will have jumped, because there has been observable capital flight from the banks and public sectors of the economies perceived to be weaker.

All that said, none of this would matter much if we could be completely confident that monetary union is forever and no member could ever leave. It would be an interesting technical nicety.

So why does it matter if Greece owes 91bn euros or more to the Bundesbank and other central banks, if the Greek central bank is just the right-hand liability column of the consolidated accounts of the European central banking system?

Of course that technical nicety points to an underlying economic problem, namely that some countries in the eurozone – Greece, Portugal, Italy, Spain, Ireland and so on – have been consuming more than they earn, which is not sustainable forever and needs sorting.

As the FT’s Martin Wolf (and others) have repeatedly pointed out:

And, to digress for a second, if you wish to be a bit gloomy about the ability of today’s European Union summit to clear up the eurozone’s mess, you would note that what is on the agenda does not address the eurozone’s serious structural weakness – which is the imbalance between Germany as the great producing and saving nation, and much of the rest of the eurozone as consuming and borrowing nations.

Martin Wolf was searing in yesterday’s FT about how the Franco-German plan to limit government deficits does not tackle how German efficiency and thrift has for years been subsidising Spanish, Italian and Greek inefficiency.

Rather than improve their productivity to boost exports adequately, the households, business and governments of the weaker eurozone economies in effect borrowed from Germany to boost lifestyles.

That said, if we assume that at some point the eurozone will set about correcting this fundamental source of instability – which requires painful cuts in the real wages of workers in the debtor nations, and an increase in German consumption – then the related imbalance between eurozone central banks via TARGET2 doesn’t matter.

Over time, as Italy, for example was seen to be getting its debt burden under control, those who have lent to the Italian government would feel less compelled to get their money out – and that would be reflected in the Italian central bank owing less to the German central bank in the eurozone banking system’s TARGET2 internal book-keeping arrangements.

But here’s the thing. Right now, we are a long way from the creditors to Italy, Spain, Greece and the other highly indebted economies feeling wholly confident they’ll get all their money back. And as a result we cannot be certain that a run on either the banks or the governments of these countries won’t lead to the fracture of the eurozone.

Which means that the hundreds of billions of euros owed to the German central bank by the weaker eurozone economies does have a bit more significance than as an accounting entry in a giant consolidated balance sheet for the eurozone.

To put it another way, if there is the faintest chance of Italy, Greece, Ireland and the rest reverting to their own currencies and reneging on what they owe, then Germany’s net positive balance of 390bn euros on the TARGET2 system (which is probably significantly bigger than that now) is German taxpayers’ money that is seriously at risk of loss.

That’s why the optimists say that Germany simply has too much at stake to allow the eurozone to collapse – and also why those who believe the eurozone can’t be fixed are an anxious bunch.

Which leads me to ask: if Germany can’t allow the eurozone to collapse, why is it wedded to a stance (e.g., its objection to eurobonds) that increases the likehihood of just that?

If you’re wondering why the euro, and the prices of all other risky assets (i.e., all assets except U.S. Treasuries) are plunging today, here’s your answer:

As reported by the Wall Street Journal (no link):

German Chancellor Angela Merkel, whose positions have shaped the response to the crisis since its inception, restated her position that common euro-zone bonds were no solution to the crisis—and said she opposed lifting the cap on the euro-zone bailout funds beyond €500 billion ($651 billion).

Euro bonds “aren’t suitable as a rescue measure,” she told the German parliament.

Ms. Merkel said the path to fiscal union was irrevocable, but that it could take years to overcome the crisis.

The Chancellor isn’t the only German to blame. From Reuters, here’s Jens Weidmann, President of the German Central Bank:

Weidmann delivered a blow to hopes of more decisive ECB intervention to quell the euro zone crisis, saying his peers at the bank were growing skeptical of its bond-buy program, which he openly opposes.

Weidmann was witheringly critical of appeals for the ECB to do more to help debt-choked governments, comparing them to alcoholics pleading to be given a bottle:

“It is like an alcoholic saying that I need to get a bottle tonight. Starting tomorrow I will be clean and abide by the rules, but I need the bottle tonight. I don’t think it is sensible to give the alcoholic the bottle. He won’t have an incentive to solve the problem.”

He said his Bundesbank would only provide fresh funds for the IMF to help fight the euro zone crisis if countries beyond Europe do so too.

“If, for example, the U.S. and other important donors say they will not participate, then, from our viewpoint, it will be uncomfortably close to state financing … That’s why the conditions we have formulated are so important. If these conditions are not met, then we could not give our approval to these credit lines.”

The cliché of German stubbornness is alive and well.

——————–

Now to my favorite topic: austerity.

From the FT, here’s Nobel Laureate Amartya Sen:

Speaking at the Indian finance ministry’s Delhi Economic Conclave, Mr Sen said the rush to impose austerity plans across Europe was a “spiralling catastrophe,” and was even threatening to drag the US in the same direction.

The Nobel Prize-winning economist said that Europe’s leaders were mistaking the need for greater financial responsibility and accountability in governmental expenditure for more radical, short-term measures that could worsen the current downturn. He warned that large-scale, indiscriminate cutting of government expenditure could “decimate” lives and nip economic recoveries in the bud.

“Many countries in the west seem to be doing their best to go straight into the mouth of a fairly hefty snake. To move from that frying pan of mismanagement to the fire of indiscriminate cuts to satisfy the creditors and to placate the rating agencies has not been helping these countries to move into a responsible forward-looking recovery programme.”

Mr Sen singled out the UK, describing Prime Minister David Cameron’s belt-tightening measures as “oddly confused” and “certainly mistimed”. Many economists have warned that the austerity measures have raised the risks of economic contraction and a double-dip recession.

Mr Sen implored policymakers to study the years after the second world war and during former US President Bill Clinton’s office, when economic growth played a significant role in reducing public debt.

Mr Sen’s views reflect growing misgivings among Indian and, more widely, Asian economists and policymakers about the policy choices in the developed world in the wake of the 2008 global financial crisis. They fear that Europe, which has strong linkages to India, may suffer a decade or more of low growth.

Sen’s worries are widely shared.

Reuters reports:

The austerity zeal risks tipping the continent back into recession and a downward spiral of austerity as pitiful growth prospects undermine budgetary targets and ramp up debt burdens, meaning further austerity is required.

Says Stephen Kinsella, professor of economics at the University of Limerick:

“The expansionary fiscal contraction story says that you cut, you show you are serious about cutting and then the confidence fairy will come along and she will start pulling in private investment. The expansionary fiscal contraction story is a lie. You don’t cut your way to growth.”

With the crisis spreading like wildfire through the currency bloc’s core, pushing up borrowing costs to unsustainable levels, countries are relying more on blunt budget cuts, than time-consuming and difficult structural reforms, to get results. The upshot is ballooning dole queues, shuttered businesses and public services stretched to breaking point.

On the streets of Athens and Dublin poverty has visibly increased with more and more homeless people huddling in doorways. In Spain, emergency wards have been shut and in Italy, retailers are struggling to get by.

Says Attilio Lebole, head of Textura, a mid-range clothing wholesaler based in Florence:

“Consumption has been falling pretty steadily since the winter of 2008. Normally in a crisis, it starts with menswear and goes to womenswear and children. This time, it’s hit them all at once. Demand is falling, there’s no doubt about that. Only foreigners are still shopping.”