EU Economy Debacle: How Germans Botched the Spanish Bank Bailout
By Clive Crook | Bloomberg.com
Europeís latest initiative to subdue its financial crisis fell apart in less than a day.
The instant response to the plan for supporting Spanish banks had been euphoric. Even as bond markets pushed the cost of Spanish public borrowing even higher, in effect declaring the country insolvent, politicians were still applauding themselves.
European Union leaders thought the plan would impress the markets because the sum committed to support Spainís banks, 100 billion euros ($125 billion), looked adequate -- bigger, in fact, than investors expected. The EU thought it was getting ahead of events for once.
It wasnít. Mistakes in the dealís design made the plan self-defeating. These errors are worth noting, because they lie at the core of the EUís larger strategy.
The crucial thing is that the EU gave its support not directly to Spainís banks but to Spainís government, which would then lend it on. This had two fatal consequences. First, it added to Spainís public debt, making its government less creditworthy. Second, depending on how the loans are structured -- a detail left vague as the rescue was announced -- Spainís new debt to the EU might subordinate existing bondholders. Curbing the risk of a faster run on Spainís banks was good, investors presumably calculated, but not good enough.
Both dangers were recognized before the deal was put together. Why then did the EU design the rescue this way? Why not simply extend direct EU support to Spainís banks? The answer is Germany.
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Chancellor Angela Merkel and her parliamentary allies insisted that Spainís government should bear responsibility for the rescue. German taxpayers should not be directly exposed to the costs of helping Spainís banks. On the same reasoning, Merkel has said that the Spanish rescue funds should come from Europeís new permanent lending facility, the European Stability Mechanism, on terms that would make the new debt senior.
Itís of a piece with Germanyís whole approach. The overarching fact in this crisis is that German taxpayers feel cheated. They didnít want the euro in the first place, suspecting it would become a transfer system that would put them on the hook for other countriesí profligacy. That, of course, is exactly what happened. To blunt this resistance, Germanyís leaders promised at the outset there would be no bailouts, and they insisted on lots of rules and mechanisms to back this up. The crisis has blown that structure to pieces, but Merkel is still trying to keep the promise -- even if the EU, and the German economy along with it, collapses as a result.
Germanyís government is in a horrible political bind. Even allowing for this, the countryís response to the crisis now borders on the unintelligible.
On a small scale, the policy simply wonít work. Spain and the other distressed economies canít manage this crisis without help from their EU partners. The absurdity in Germanyís approach is that it concedes this -- in practice though not in principle. It has already committed its taxpayers to many semidisguised channels of support. The biggest is the commitment that the ECB has made through liquidity support to euro-area banks and the balancing operations of national central banks. If the euro system doesnít survive, enormous losses will find their way back to German taxpayers.
The choice is no longer between bailouts and no bailouts. It is between bailouts that work and bailouts that fail. The Spanish fiasco is one example. Germany has just put its taxpayers on the line to help Spanish banks. To cloak that commitment, it built failure into the design of the rescue. The politics may be understandable. That doesnít make the policy defensible.
Seen from a higher altitude, Germanyís strategy is even more perplexing. Merkel, echoing the line of previous German chancellors, says she wants closer European union. With the EU at its present state of integration, she argues, transfers to overspending governments are unacceptable. National governments need to surrender sovereignty to the European center, she says, so that democratic accountability is restored and proper standards of governance can be maintained.
Meaning what? Perhaps she imagines that this new political union would put Germany in command. Letís call that an idiosyncratic view of political integration. Assuming non- Germans would be allowed to vote, Germany would be less in command than now. Itís the profligate whose political clout would increase. Deeper union would overwhelm the German anomaly of prudent public finance.
Merkel and her northern European allies are right that the EUís member nations have different views and traditions on taxes, public services, redistribution, risk-sharing, public borrowing and every other aspect of public finance. They are right that these differences put limits on the scope for fiscal cooperation. It wouldnít be fair, letís say, to ask German taxpayers to help pay for Franceís more generous health-care benefits.
On the other hand, itís insane -- dangerously insane -- to see full political union as the solution to that problem. Does anybody think that political union would gently smooth away those differences? Far-right nationalism is already resurgent in many EU countries. Thereís no demand anywhere, including Germany, for the kind of European Union that Merkel keeps advocating as the price for fuller cooperation. Germanyís policy on the crisis boils down to this: We canít confront our economic calamity until weíve agreed on a future for Europe that none of us wants.
In previous columns Iíve said what I think needs to happen: Limited, conditional and explicit debt mutualization to restore confidence, combined with a renewed emphasis on the accountability of national governments to their voters. The first, with the emphasis on ďexplicit,Ē is the minimum requirement for avoiding a European economic catastrophe. The second accepts that the basis for a United States of Europe doesnít exist, and thatís why the debt pooling should be limited and conditional.
The tension between the two parts is obvious. Thereís no alternative but to manage it. Union where necessary, sovereignty where possible. Itís Germanyís least-cost choice, and thatís what Merkel should be telling her voters.
Article from: bloomberg.com
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