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The Spending & Bailouts in Europe Have to Stop

The Spending & Bailouts in Europe Have to Stop

By Robert Robb - June 15, 2012

I don’t know how the European sovereign debt and banking crisis will end. But I think I do know how the end will begin. It will begin with Germany saying no unequivocally.

The latest maneuver to end the crisis was the announcement that Spain would borrow $125 billion to bail out its banks. The surprise is that anyone was surprised that this didn’t work.

The problem in Europe is that its governments have overborrowed and its banks own too much of the dodgy debt. Why would anyone think that more borrowing would be regarded as the solution to too much borrowing?

There are certain fundamentals that lead to sustainable economic growth. Business cycles are inevitable. But when economic woes are a result of departing from those fundamentals, the only way to get back to sustainable economic growth is to return to the fundamentals.

In the short-term, that’s economically painful. But attempts to return to sustainable economic growth painlessly inevitably involve avoiding or postponing the very things necessary to get back to sound fundamentals. That’s what’s happening in Europe (and the United States).

In Europe, the painless avoidance schemes all require Germany to take risks to help out more profligate and less prudent countries.

Germany’s economy is export-driven and the rest of Europe constitutes a very large part of its export market. So, Germany is far from indifferent to the fate of the rest of Europe.

And so far, it has countenanced several avoidance schemes. It has backed bailout programs for several countries. It turned a blind eye to the European Central Bank making long-term loans to European banks, which in turn bought up large chunks of sovereign debt that had few other buyers.

None of it, however, has made a material difference. Several European countries are effectively cut off from credit markets. The solvency of their banks is threatened by the amount of sovereign debt they bought that is now largely unmarketable.

So, the call is for Germany to do more. Agree to euro bonds, sovereign debt guaranteed by all European countries. And agree to a banking union, in which deposits in European banks are also guaranteed by all European countries.

Germany is the only creditworthy country in Europe large enough to matter. So, this is really a call for Germany to guarantee the debt and bank deposits of other countries.

Germany has not said yes to these additional measures. But it hasn’t said no, either.

Instead, it has said they are premature to discuss until there is an austerity union in which other countries adopt Germanesque fiscal discipline.

This isn’t going to work. An externally imposed austerity offends democratic sensibilities, as the experience in Greece illustrates. And governments cannot be counted on to keep their word about austerity, irrespective of how binding on paper it seems.

And the German people, who underwent their own painful economic restructuring about a decade ago, are highly unlikely to ever support guaranteeing the debt and deposits of other countries. Moreover, Germany doesn’t have that much fiscal headroom. Its own debt is already close to the 90 percent of GDP economic historians say is the danger zone.

Rather than attempting to impose external fiscal discipline, Germany should just say no to additional bailouts, guarantees and currency debauching.

Other European countries would then be on their own, deciding what to do through their own democratic processes about the consequences of overborrowing. They could try their own avoidance schemes. Or they could do what Germany did a decade ago when it was regarded as the sick man of Europe. Or what tiny Latvia has recently done, when it kept a hard peg to its currency and endured a contraction of around a fifth of GDP. But it is now soundly on the road to recovery.

Leaving other countries to fend for themselves would be messy. But what is going on now is hardly tidy.

Ultimately, Germany is going to have to say no. Until it does so, the European crisis won’t have reached the beginning of the end.

Robert Robb is a columnist for the Arizona Republic and a RealClearPolitics contributor. Reach him at robert.robb@arizonarepublic.com

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