NEIN!

5/11/10

As I contemplate the bailout of Greece and, potentially, the other PIIG countries, a few thoughts come to mind.

The bailout is widely advertised as being worth about $1 trillion. But the biggest chunk of the bailout, the 440 billion euro (about $560 billion) Special Purpose Vehicle, is not real money; it is a contingent amount that must be borrowed, with the backing of the euro governments, if needed and if the smaller component, the 60 billion euro (about $76 billion) is exhausted. Further, the SPV needs parliamentary approval at the national level in most cases, so it’s not a done deal. We are kidding ourselves when we use anodyne monikers like “euro governments” or “eurozone governments” to denote those backing the SPV. Effectively, it will be Germany and, to a lesser extent, France who will be backing the SPV. Will the French, and especially the German, populaces go along with an artifice designed to tap their bank accounts to bail out their less frugal neighbors on the fringes of Europe? Serious thinkers can only hope the answer is no and that the whole operation will come a cropper.

Why should serious thinkers hope the whole bailout, which the kids on Wall Street seemed to like so much yesterday, collapses? The moral hazard is obvious; why be frugal when Uncles Wolfy and Yves will always be around to cover one’s profligacy? The answer to the moral hazard problem would seem to be a more federated Europe. Would that be such a good thing? The British don’t seem to think so, and time is proving them right. Doubtless the French and the Germans, or at least the French and the Germans who make France and Germany work (i.e., not the French and German politicians) are doubtless having their misgivings. There are plenty of reasons, including but transcending economics, that Europe has never been “united” in the last, oh, 1,534 years. Don’t assume that the current generation of Europeans (or the current generation anywhere, for that matter) is somehow smarter than its forbearers. In fact, betting the opposite would be well advised.

In the more immediate term, the particulars of the bailout would indicate, if it works, a period of fiscal austerity on the continent, or at least on its fringes. At the same time that Europe would be experiencing fiscal austerity, it would be experiencing monetary laxity though European Central Bank (“ECB”) purchases of Eurozone government bonds, mostly those issued by the PIIGS (Portugal, Ireland, Italy, Greece, and Spain, though some, but not much, controversy surrounds the inclusion of either or both of Italy and Ireland), effectively monetizing the debt of the PIIGS. Oh, yes, the ECB assures us that it would sterilize such purchases so the net effect on monetary policy would be zero, but we’ve heard that song before. Central banks are no more given to honesty than anyone else. So it looks like the Eurobailout will lead to fiscal austerity and monetary profligacy, or something approximating the Carternomics of our second most failed president and his accomplice G. William Miller at the fed. Stagflation anyone?

Again, let’s hope the Germans maintain their normal sobriety, the French summon some outrage, and this whole Eurobailout is sold down the Rhine.