Inquiring minds are looking over The Pond to see Europe officials attempting to prove a famous theory of Albert Einstein. From the WSJ’s “…Euroland Are Proving Einstein’s Theory…“:
“Insanity: doing the same thing over and over again and expecting different results.” So, it is alleged, spoke Albert Einstein. All over Europe officials are trying to prove him right.
Greece led the peripheral countries in piling up debts that it had little hope of ever repaying. Non-peripheral countries, most notably Britain and France, joined in the fun, the latter despite its commitment to its Euroland partners to keep its fiscal deficit within 3% of GDP — in the event, borrowing reached 8%.
Cometh the markets, cometh reality: payback time. National cupboards being bare, the Euroland authorities stepped in with a cunning plan to handle excessive debt: borrow more to repay the wild borrowings of the member countries. And the Irish government will drive its deficit to 32% of GDP by borrowing to bail out banks hit by the inability of property developers to repay excessive borrowings. If more borrowing to repay excessive borrowing doesn’t fit the great physicist’s definition of insanity, it is difficult to tell what does.
On to austerity. No responsible observer would deny that the welfare states of many Euroland countries should be trimmed. But austerity is not costless: it can cost jobs, profits and, therefore, tax revenues. Unless the central banks oblige with an offsetting loose monetary policy. Which the European Central Bank is disinclined to do.
Yves Mersch, a member of the ECB’s governing council, believes the euro zone recovery is now self-sustaining and agrees with Jürgen Stark, a member of the Bank’s executive board, that long-term liquidity support for the area’s banks can be reined in. History suggests that austerity without loose monetary policy can be self-defeating. Never mind: Eurocrats will pay any price to avoid the humiliation of restructuring and unleashing inflation worries in Germany. So a combination of austerity and tighter credit is in store, to the applause of the rating agencies, those infallible appraisers of risk that endowed securitized subprime mortgages with triple-A credit ratings. Further proof of Einstein’s genius.
In the end, this crisis is not about whether the piper will be paid, but who will do the paying. One set of candidates includes creditors and euro-zone citizens with fixed incomes. They can be forced to pay by having the central bank print lots of euros, produce inflation, and repay creditors with a debased currency. The ECB has said “no” to what is in effect a wiping out of creditors, with collateral damage inflicted on anyone without a cost-of-living escalator attached to his income source. And if the ECB weakens, there is always the loud “nein” from Berlin, representing a Germany ever fearful of the political consequences of inflation.
Oh…you were thinking of a different Einstein theory. Sorry for the mix-up.
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