Friday, December 17, 2010



The Wall Street Journal’s coverage today (Friday, 12/17, page A8) of the ongoing machinations of the eurozone countries in their efforts to save their tattered currency union contained a succinct and useful summary of three alternative solutions to problems presented by euronations’ on the financial and geographic fringes of the zone getting themselves into big trouble and expecting Uncles Wolfy and Pierre to ride to their rescue. The Journal listed the merits and demerits of a closer fiscal union, the abandoment of the euro, at least on the part of some of its current users, and a debt restructuring under which some of the bondholders might have to (sniff, sniff) lose some money. As on most things, I have some of my own opinions on these alternatives.

Closer fiscal union, a small step on the very slippery slope to a common fiscal policy, would make some sense if it amounted to the Germans and, to a lesser extent, the French, managing fiscal policy for the entire continent. I wouldn’t mind seeing the Germans take responsibility for American fiscal policy, but that is another matter, and a digressive one at that. However, such a fiscal union would amount to fiscal policy by a committee composed of representatives from each of a group of widely disparate economies, financial systems, and cultres. This would be a nightmare of desultory and discordant didacticism and debauchery in which nothing is accomplished and nobody learns anything. Even if a common fiscal policy were to amount to the Germans managing everyone’s budgets, most eurozonites would not go for such a deal for obvious political reasons; two wars have been fought within the last hundred years over the principles involved in such a plan. So this idea would probably is a nonstarter.

I have likened abandoning the euro to trying to extract the ingredients from cake batter. (See my 5/16/10 piece “JOEY, YOU GOT THAT LITTLE OLD DIME AND I GOT THIS BIG OLD NICKEL. BUT HERE’S WHAT I’M GONNA DO FOR YA…”). The problems would be myriad: contracts written in euros would have to be renegotiated or become virtually worthless, the new drachmas, punts, pesetas, etc. would be greeted with the same enthusiasm as the bedding of those who suffered from the Plague, one of the eurozone’s earlier bearers of travail and misfortune. Germany, an economy built on exports, would find its currency so strong as to put a serious crimp into its prosperity and its very economic model, etc. Despite its precipitous downsides, abandonment of the euro, either by the fringe countries or by all euro nations, would have the virtue of reuniting those natural partners, monetary and fiscal policy. And one currency for such a widely disparate group of countries (Those who think that our generation has the wisdom to transcend the petty and excerebrose quarrels and jealousies of our benighted ancestors might find this hard to believe, but not everything can be solved and all differences cannot be transcended by money and technology, nor should they necessarily be. And, again, Europe is a continent that has hosted the planet’s most execrable wars for the last four centuries or so. Those wars weren’t fought over nothing. But I digress.) makes little sense. So the euro is probably doomed for the long run, but the long run may not come in this instance for a very, very long time.

The third alternative, debt restructuring, or outright default, makes the most sense. Yes, the costs will be high and the eurozone countries themselves, primarily through their banks, will be the greatest victims of such an default. But that is the way the world should work; one, whether one is a country, an institution, or an individual, should bear responsibility for one’s actions; that way, one is provided a severe disincentive to engage in foolishness and irresponsibility. If one expects others to bear the responsibility for his misdeeds, and those expectations are met, one will continue in his misdeeds to the ruin of both himself and his ostensible saviors.

Some will wail that, should one eurouser default, bondholders and other creditors will abandon all those countries that sell debt denominated in euros, or at least will prematurely punish some euroissuers out of fear that they will soon catch the europlague. This is nonsense, or at least it ought to be. The bonds in question are held primarily by institutions that pay people huge money to analyze and price credit. These so-called financial professionals make fabulous livings ostensibly to make reasoned, intelligent decisions, not to assume that all eurodebt is created equal and to panic like small children at the first sign of trouble. We can get people to make such assumptions, and perform in such childish ways, for a lot less money than what these institutions are paying these poltroons. Indeed, if such a default, or at least a negotiated restructuring, were allowed to take place, the really smart financial people, those who genuinely earn their money by being clever and hardworking enough to make distinctions between the merits of various debtors, will be presented with an enormous basket of opportunities to enrich themselves by exploiting the panicky behavior of the poseurs whose only discernible ability is that of being able to hoist an enormous pay check while lording it over those who don’t have the connections to have been rewarded such a lifelong sinecure. Indeed, if an economy, global or otherwise, is to work efficiently, the smart people ought to be able to make huge fortunes exploiting the opportunities presented by the market imbalances presented by the pretenders and fakers. But the euroministers have been cowed into swearing up and down that such a default will not be allowed for fear of panicking the denizens of the financial world who seem to believe that socialism is only a failed system for the poor and the working class, that socialism works just fine for the well-heeled.

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