Eurozone Too Big To Save?

"The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany."

“The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany,” says Free Democrat Party backbencher Frank Schaeffler, a member of Angela Merkel’s governing coalition. Indeed, the country that all are looking to to save the Eurozone from collapse is now in big trouble.

Germany fell short in its attempt to sell off sovereign debt and the yield on German 10-year bonds fell to an all-time low and is now below the yield of similar bonds from the UK. Reuters quotes Marc Ostwald, strategist at Monument Securities in London, as saying the bond sale was “a complete and utter disaster” and that report it “sparked fears that Europe’s debt crisis was starting to threaten even Berlin, with the leaders of the euro zone’s two biggest economies still at odds over a longer-term structural solution.”

Meanwhile, WSJ‘s Eyk Henning reports that “Germany’s banking associations sent a joint letter to the EBA on Wednesday, asking for permission to hand in recapitalization plans on Jan. 13 instead of by Dec. 25.”

The Economist’s Ryan Avent notes that bad news is “coming fast and thick now” with new shocks coming before the last is digested. He notes that “trouble is growing around the eastern periphery of the euro zone. Poland’s zloty is under pressure, and there are signs of bank runs in the Baltics.” He continues, “Perhaps worst of all, the financial strain in the euro zone is increasingly apparent in the real economy. New data indicate that euro-zone industrial orders plummeted in September, falling by 6.4%. Orders dropped by 4.4% in Germany, 6.2% in France and 9.2% in Italy. Predictions that the euro zone will face little more than a shallow recession in 2012 increasingly seem to be wildly optimistic.”

BBC economics editor Stephanie Flanders declares that, “Two very worrying things have happened in the eurozone in the past two weeks. The first is that financial markets have started to take seriously the idea that the single currency will break up. The second is that the politicians with the most to lose from that happening have dug in their heels.” She adds, “In my conversations with analysts, traders and officials, I’m finding more and more of them are talking about the end game for the euro. Not the end, necessarily, but a moment of truth very soon that will either force a big leap forward, or a wrenching break-up.”

Indeed, Reuters surveyed “twenty prominent economists” and a majority “predicted that the euro zone was unlikely to survive the crisis in its current form, with some envisaging a ‘core’ group that would exclude Greece.”

meeting today in Strasbourg between the leaders of Germany, France, and Italy aimed at “showing support for Mario Monti and his policy of reforms” will instead become yet another crisis summit. Once again, Sarkozy will make a push for the European Central Bank to print money and to institute a common bond across the Eurozone. Once again, Merkel will surely demur despite contagion seeming to have spread even to Germany.

Flanders points to the dilemma that the Germans have been struggling with since the outset of the crisis: “Germany would suffer enormously if the euro broke up, but Germany would also pay a price if the eurozone were kept together only under duress, after months of deepening market turmoil and, probably, further bailouts. An economic solution to the crisis that helps the periphery grow will require higher inflation in the core, ie Germany. A solution that doesn’t help those countries grow will hammer German exports and require continued fiscal transfers from the center.”

Avent hopes that, “the stunning German bond-market failure may shock leaders their into recognising their own great vulnerability and pushing for bold initiatives to slow the crisis.” But that seems unlikely.

Moreover, it’s quite possibly too late. The Atlantic’s Megan McArdle observes that, “A year ago, Germany and France could probably have saved the euro–at least for a time–by stepping in to guarantee all the debts of the peripheral euro zone nations.” But, of course, that wasn’t politically viable with the crisis so far from home. “At this point, however, with the panic in full flight, it’s not entirely clear to me that even a 100% guarantee would staunch the bleeding for more than a short time. ” She adds, “Effectively, Germany and France and a handful of other tiny countries have to guarantee both the sovereign debt and the bank liabilities of the whole eurozone.  Given the holes that recent events have exposed in these systems, can they credibly do that?  Even if the Greeks and Italians don’t use that guarantee as a blank check to avoid reform?”

Avent acknowledges that  ”matters rapidly seem to be spinning out of the control of fiscally limited governments. It will take the power of the printing press to stop the panic. But the ECB seems if anything more reluctant to save the situation than the German government.”

FILED UNDER: Economics and Business, Europe
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Ben Wolf says:

    Germany is giving us a good run in becoming Most Disliked Country. Bundesbank starts buying up their own debt, but they won’t allow the ECB to do it for anyone else. It’s becoming startlingly obvious they consider the EMU their personal economic empire and will ruthlessly use it to their own advantage. None of the “bailout” efforts are intended to assist member countries; the purpose is to rescue German and French banks which are on the hook for 30% of the EMU’s debts thanks to a decade of stupid lending.

  2. Loviatar says:

    @Ben Wolf:

    None of the “bailout” efforts are intended to assist member countries; the purpose is to rescue German and French banks which are on the hook for 30% of the EMU’s debts thanks to a decade of stupid lending.

    Agree totally.

    Germany vision of the Eurozone has always had a strong whiff of their old Deutschland uber alles! strategies from the past.

  3. Andre Kenji says:

    German knows what is inflation. Americans don´t know.

  4. Ebenezer Arvigenius says:

    Germany vision of the Eurozone has always had a strong whiff of their old Deutschland uber alles! strategies from the past.

    Complete and utter nonsense.

  5. john personna says:

    Looking back I see that Ben and I were Eurozone skeptics by this past August.

    It sure has been a slow motion “not quite train crash yet” since then ….

  6. Console says:

    Part of the political problem has been abetted by the media trying to substitute absurd cultural stereotypes in place of analysis. Seemingly trying to turn things into this morality play where the responsible germans shouldn’t be on the hook for the lazy greeks. But reality is pretty much what Ben Wolf said up thread.

  7. Ben Wolf says:

    @Andre Kenji:

    German knows what is inflation. Americans don´t know.

    The ECB acting as lender of last resort won’t create significant inflation because the transactions are endogenous to the banking system. Germany’s leaders are driven by neo-liberal ideology rather than empirical fact.

  8. rudderpedals says:

    @Andre Kenji:
    Hey way to force me to feel old. A spell of mild inflation would go a long way towards unwinding the housing finance crisis.

  9. Ben Wolf says:

    @Andre Kenji: Also, it’s a little silly to suggest Germany is afraid of inflation induced by debt “monetization” when, per my original comment, Germany is monetizing its debt via its central bank. Germany is sending a clear message to the EMU that it’s fine for Germany to do this but no one else is allowed to.

  10. john personna says:

    @Andre Kenji:

    We should note that Americans do know what inflation is, and at one point our government did have to pay 14% interest on 30 year bonds. What we don’t know are the further reaches of hyperinflation beyond that.

    Seriously, the lack of distinction between inflation and hyperinflation is a drag on decision-making in the US and in Germany.

  11. waltm says:

    @Andre Kenji:
    My grandfather always carried a 50 million DM weimar bank note as a reminder. Imagine amongst Merkel’s coalition of the CD/CSU/FDP folks had similar grandfathers.

  12. Robert Prather says:

    The Germans are fighting a problem from 90 years ago, just like our Fed is fighting a problem from 30 years ago. They’re worried about an inflationary expectations anchor in a time of low / disinflation. They’re killing our chances for resumed growth.

  13. OzarkHillbilly says:

    @john personna:

    “Those were the days my friend,
    we thought they’d never end…
    We’d sing and dance forever and a day
    We’d live the life we choose
    We’d fight and never lose
    For we were young and sure to have our way.”

  14. OzarkHillbilly says:

    @OzarkHillbilly: actually meant for @rudderpedals:

  15. Ron Beasley says:

    @Ben Wolf:

    None of the “bailout” efforts are intended to assist member countries; the purpose is to rescue German and French banks which are on the hook for 30% of the EMU’s debts thanks to a decade of stupid lending.

    That’s correct but not the entire story. The single currency EURO was the creation of the plutocrats at the TBF banks to increase their power over sovereign governments.

  16. MBunge says:

    @Ron Beasley: “The single currency EURO was the creation of the plutocrats at the TBF banks to increase their power over sovereign governments.”

    Which is the real root of the problem. The Eurozone was an attempt to create a political union through non-political means. Put simply, why shouldn’t a country like Greece be able to opt out of the Euro? There’s no economic reason for it since the Eurozone could then keep Greece out or make extremely high demands for re-admitance. It only is a crisis because Greece leaving would blow a huge hole in all the non-economic aspects of the Eurozone.

    Mike

  17. We should note that Americans do know what inflation is, and at one point our government did have to pay 14% interest on 30 year bonds. What we don’t know are the further reaches of hyperinflation beyond that.

    Most Americans seems to have forgotten what inflation is because everyone finds normal about someone saying “provoking a little bit of inflation”, like that could be controlled like a toy.

  18. Mike Stallard says:

    @Ebenezer Arvigenius: @Ebenezer Arvigenius:
    I don’t really think this is fair. What they are full of is rather the 1960s when sex, drugs ‘n’ rock and roll were king. I think they really believe that everyone should be one in peace and love. Europe should be a place of freedom without war. It is just common sense.

    So when people like Mr Cameron are lukewarm and just cannot join in, they are like the old frumps who disapproved of the 68-ers. If you didn’t get hep to the Beatles, you were square.

  19. john personna says:

    @André Kenji de Sousa:

    Success should not breed confidence?