George Soros has presented, in the FT, the best plan I have seen for saving the Euro and putting Europe on a path toward economic growth.
Of course, like all such plans, it relies on Germany agreeing to underwrite European-wide obligations (Soros calls them European Treasuries, instead of Eurobonds, in order to make them short-term securities rather than long-term obligations) that would replace the existing sovereign debts of Spain, Italy, Portugal, Greece, and other overly indebted economies with new obligations at far lower rates of interest.
In practice, there is no reason why Germany should not do so. A $1 trillion Euro bailout fund, drawing $600 billion from Germany and the rest from France, the UK, Netherlands, Sweden, Denmark, and Belgium, would cost each German $1,000 per year for ten years; a reasonable price to pay to save the Euro. Much of that could probably be recovered if the economy improves, as with the US TARP; moreover it is a lower cost than Germans would likely pay if Germany’s customers in southern Europe underwent a sudden collapse.
So why hasn’t this been done already? Why have we spent 3 years watching the economies of Spain, Italy, Greece, and other Euro countries falter and slide, and their debts mount and credit crumble?
The reason is that Germany’s leaders, far from making the case to their voters that their interests lie with a strong Europe, and that for a relatively small price now they can recapitalize European banks and countries and avoid a much more costly Euro crisis, have instead insisted that Germany’s virtuous citizens should not have to pay one Eurocent to relieve the indebted nations of southern Europe whose foolish citizens and governments have been wastrels. $10,000 per German citizen, even spaced over 10 years at negligible or negative real interest rates? Unthinkable! given this moral framing.
Now Germany’s leaders and Bundestag are running out of time. Not totally unreasonably, they have been saying that they will not advance funds to relieve the problems of their southern neighbors unless they have guarantees of fundamental change in the latters’ fiscal structures. After all, why finance a huge bailout now if they may face exactly the same problem of overly indebted southern neighbors again in 8-10 years, as is likely if their wages and fiscal patterns remain unchanged?
However, this is like a rescuer on the dock trying to extract promises to change his ways from a drowning man. You do not have unlimited time to negotiate. At some point you have to throw the lifesaver, and draw up the contract for negotiations after the victim is safely on the dock. Otherwise, instead of having a changed man, you risk having a dead drowning victim.
Europe is now drowning in excess soveriegn debts and insolvent banks; Germany has to decide to throw the lifesaver. Time is running out…
What is at risk of drowning here is not the populations themselves — there is no chance of Greece ceasing to exist — but the model of political economy that has dominated our sense of governance over the last fifty years. Perhaps that has to drown. Perhaps it has reached the end of its days.
It might be . Does look like that.
Another possible analogy is that of “tough love” — the name of the moment when families decide that continuing to support the wastrel brother-in-law, bailing him out of situation after situation, is just enabling his gambling, his drugs, and that he has to reach bottom to have any chance of serious reform. That is also a possible analogy. I know there are others, but of the two, which do we pick? In the drowning man analogy the the problem is assumed to be limited to the immediate situation, wheras in the case of the wastrel brother in law the problem runs a lot deeper. In the first case the problem is not systemic; in the latter, it very much is. Which do you think applies better here? If you think the latter applies, then the best thing Germany could do for Greece would be cut it off. Even if you think it applies only somewhat, then a general default and exit from the zone would at least have this as an upside, whatever its downsides might be.