Geral
By MATTHEW WILL, WSJ
The European financial crisis has created an unusual mix of allies. Politicians, hedge fund managers, liberal pundits and the financial press are determined to convince German Chancellor Angela Merkel that economic salvation requires the European Central Bank to issue eurobonds.
Prior to last week's European Union summit in Brussels, the Organization for Economic Cooperation and Development endorsed French President Francois Hollande's plan to do just that and insisted Mrs. Merkel agree. She wouldn't, but at the summit she was all but held captive until relenting to some other bailout.
Meanwhile, money managers have waged their own campaign to get Mrs. Merkel on board. Financier George Soros has predicted dire consequences for Europe if Germany does not acquiesce. Harvard historian Niall Ferguson accused Mrs. Merkel of repeating the mistakes of Weimar Germany that led to the collapse of democracy. He did not use the "N word," but we all know an appeal to German guilt when we see one.
Each faction has its own reason for pressuring Germany but all share a common characteristic: They are wrong.
Historically, nations tax, borrow and spend until there is nothing left to tax and borrow. Because of the risk of riot, insurrection or removal from office, politicians refuse to directly cut spending. Instead, they print money. Unfortunately, the citizenry does not realize printing money and the ensuing inflation amount to a cut in benefits. Then politicians lay the blame for inflation on greedy capitalists who raise prices.
Europe's bad boys have played this trick repeatedly, undermining the value of their currency and reducing their citizens' standard of living. From 1980 to the launch of the euro in January 1999, the Italian lira and Portuguese escudo lost 108% and 244% of their value against the U.S. dollar, respectively. Greece devalued the drachma 583% against the dollar from 1981 until its euro entry in January 2001. Meanwhile, the deutsche mark remained remarkably stable against the dollar, gaining a mere 1.74% over 20 years.
Now the people borrowing and spending the money, such as Greece, Italy and Portugal, are not the same people controlling the money supply. This is handled by the European Central Bank, whose policies Germany monitors closely. When spendaholics reach their tax and borrow limits they can no longer print money. Thus the violent convulsions reverberating through countries that must face the music.
Until now, investors saw socialist calls for more borrowing and more spending as ridiculous, since no one will loan them money. The only reason private investors now care is because they were recently forced to take a 70% loss on Greek government bonds.
Then came the stroke of genius that united the forces of socialism and capitalism: Allow the profligate nations such as Greece, Italy, Portugal, etc., to borrow and spend, but require Germany to pay back the loans.
In its November 2011 Green Paper, the European Commission proposed that each eurozone member be fully liable for the entire issuance of eurobonds. Germany, with the highest GDP and good credit, has the most to lose from such an approach.
Therein lies the common ground between investors looking to save their own portfolios and politicians looking to spend their way into office. Who cares what happens to Germany and the other responsible nations?
Unfortunately, the long-term consequence of this approach will be global economic chaos. In the past, patterns of taxing, borrowing, spending and the printing of money destroyed local economies. These collapses occurred over time, and the impact was isolated. If Germany assumes the ultimate obligation of paying the debt of other nations, the bubble grows. When Europe gets to the point of collapse, who will guarantee that debt?
Eventually, money will be printed and the standard of living will fall for citizens of irresponsible nations. This is a historical reality. The only real question is, do we prefer that the entire European bubble burst at once, or mitigate the risk by allowing local bubbles to burst periodically over time? The best possible answer is for Angela Merkel to just say nein to more eurobonds.
Mr. Will is professor of finance at the University of Indianapolis.
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- The Greek Example
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Geral
Merkel: Just Say Nein to Eurobonds
By MATTHEW WILL, WSJ
The European financial crisis has created an unusual mix of allies. Politicians, hedge fund managers, liberal pundits and the financial press are determined to convince German Chancellor Angela Merkel that economic salvation requires the European Central Bank to issue eurobonds.
Prior to last week's European Union summit in Brussels, the Organization for Economic Cooperation and Development endorsed French President Francois Hollande's plan to do just that and insisted Mrs. Merkel agree. She wouldn't, but at the summit she was all but held captive until relenting to some other bailout.
Meanwhile, money managers have waged their own campaign to get Mrs. Merkel on board. Financier George Soros has predicted dire consequences for Europe if Germany does not acquiesce. Harvard historian Niall Ferguson accused Mrs. Merkel of repeating the mistakes of Weimar Germany that led to the collapse of democracy. He did not use the "N word," but we all know an appeal to German guilt when we see one.
Each faction has its own reason for pressuring Germany but all share a common characteristic: They are wrong.
Historically, nations tax, borrow and spend until there is nothing left to tax and borrow. Because of the risk of riot, insurrection or removal from office, politicians refuse to directly cut spending. Instead, they print money. Unfortunately, the citizenry does not realize printing money and the ensuing inflation amount to a cut in benefits. Then politicians lay the blame for inflation on greedy capitalists who raise prices.
Europe's bad boys have played this trick repeatedly, undermining the value of their currency and reducing their citizens' standard of living. From 1980 to the launch of the euro in January 1999, the Italian lira and Portuguese escudo lost 108% and 244% of their value against the U.S. dollar, respectively. Greece devalued the drachma 583% against the dollar from 1981 until its euro entry in January 2001. Meanwhile, the deutsche mark remained remarkably stable against the dollar, gaining a mere 1.74% over 20 years.
Now the people borrowing and spending the money, such as Greece, Italy and Portugal, are not the same people controlling the money supply. This is handled by the European Central Bank, whose policies Germany monitors closely. When spendaholics reach their tax and borrow limits they can no longer print money. Thus the violent convulsions reverberating through countries that must face the music.
Until now, investors saw socialist calls for more borrowing and more spending as ridiculous, since no one will loan them money. The only reason private investors now care is because they were recently forced to take a 70% loss on Greek government bonds.
Then came the stroke of genius that united the forces of socialism and capitalism: Allow the profligate nations such as Greece, Italy, Portugal, etc., to borrow and spend, but require Germany to pay back the loans.
In its November 2011 Green Paper, the European Commission proposed that each eurozone member be fully liable for the entire issuance of eurobonds. Germany, with the highest GDP and good credit, has the most to lose from such an approach.
Therein lies the common ground between investors looking to save their own portfolios and politicians looking to spend their way into office. Who cares what happens to Germany and the other responsible nations?
Unfortunately, the long-term consequence of this approach will be global economic chaos. In the past, patterns of taxing, borrowing, spending and the printing of money destroyed local economies. These collapses occurred over time, and the impact was isolated. If Germany assumes the ultimate obligation of paying the debt of other nations, the bubble grows. When Europe gets to the point of collapse, who will guarantee that debt?
Eventually, money will be printed and the standard of living will fall for citizens of irresponsible nations. This is a historical reality. The only real question is, do we prefer that the entire European bubble burst at once, or mitigate the risk by allowing local bubbles to burst periodically over time? The best possible answer is for Angela Merkel to just say nein to more eurobonds.
Mr. Will is professor of finance at the University of Indianapolis.
- Until Europe Meets Again
Editorial do WSJ The script could have been written in advance—Europe's leaders, meeting amid market turmoil about the consequences of failure, came together in Brussels Thursday night and Friday, and sure enough, went home declaring victory. Broadly...
- How The Euro Zone Can Restore Confidence
By DAVID MALPASS, WSJ The world is waiting anxiously for Europe to use a bazooka on its debt problems—i.e., to make such a strong financial commitment to European banks and bonds that they become investable again, unfreezing markets. But Europe probably...
- Why Europe Dithers
By HOLMAN W. JENKINS, JR., WSJ German voters don't want to bail out French banks and the French government can't afford to. 'All political lives, unless they are cut off in midstream at a happy juncture, end in failure." That morbid thought,...
- Last Chance To Save The Euro
By JOHN H. COCHRANE, WSJ The European debt discussions always paint the alternatives as either bail out countries (really, bail out their bondholders) or break up the euro. In fact, the euro and the European economic union would be stronger if countries...
- The Greek Example
Editorial do WSJ Seventeen-point-seven per cent. That was yesterday's yield on 10-year Greek bonds, up from 9.3% a year ago. Two-year bonds are closing in on the 30% mark, and the cost of insuring sovereign Greek debt stands at a stunning 18.2%. Prime...