He appears to have two key things in mind: first, that the Germans should drop their opposition to the European Central Bank directly engaging in even larger purchases of Italian debt than the tens of billions it has already purchased; and second that the Germans should support a significantly larger European Financial Stability Facility — perhaps of €2-3trillion.
Cameron has been joined in this position explicitly by the Americans (e.g. Tim Geithner), apparently by the European Commission, and at least in private by the French (though Sarkozy is supposed to have essentially told Cameron to mind his own business).
All such schemes — Eurobonds, a huge EFSF, mass ECB purchases of Italian and Spanish debt — all amount to the same thing, namely that the Germans should guarantee trillions in debts from other countries, accumulated before the euro even existed. I find the Cameron/Geithner view that this is a good solution to the euro crisis extraordinarily intellectually lazy. Of course it would be a “solution”, in the short-term, if the Germans paid off all the debts that others have accumulated across Europe. Indeed, why stop there? Why not get the Germans to pay all the debts of American households as well? We can chuck in the debts of the Chinese middle classes, whilst we’re about it. Then we’d “solve” the US and Chinese financial crises as well as the Eurozone one. Alternatively, perhaps we could “solve” the Eurozone crisis by getting the Americans to guarantee all the debts of Italy, Portugal, Spain, France and Ireland? Would Geithner be keen on that “solution”?
Doubtless many readers want to tell me to stop being silly – even stop being childish. Well, that’s exactly how I feel about the Cameron/Geithner proposal. It is childishly simplistic to suggest that the solution to the problems of Italy, Spain, etc. is for the Germans to pay their debts for them — as if Germany were their Dad come in to bail out some irresponsible student’s credit card bills. Obviously it is a “solution” in the sense that the debts are paid (assuming that in doing so the Germans did not bankrupt themselves — which is a less safe assumption than many people assume). But the problem with it as a “solution” is not, in the first instance, that it wouldn’t “work” (though there are technical reasons it might not do so over the long-term). It is that as a “solution” it is monstrously unfair on the German taxpayer.
Setting aside infantile and atavistic debates about Germany’s role in World War II, many people appear to believe that Germany somehow “owes” the repayments of their debts to these countries because Germany’s economy has done rather well in recent years. They claim that these countries’ government debts are some form of counterpart to those countries’ trade deficits, and related to Germany’s trade surplus. Then it is suggested that Germany is just as much responsible for the repayment of debts associated with her trade surplus as other countries are for the repayment of debts associated with their trade deficits — duties for “imbalances” run both ways. This analysis is flawed in more ways than I am capable of being calm and polite about, but I shall restrict myself to one point. If Germany writes off those debts, then a huge “imbalance” will remain, namely that Germans will have worked producing lots of output but will have done no consuming, whilst other countries citizens will have consumed lots of German output but will have done no producing. Outside the wheat fields of the Roman Empire and the sugar plantations of the West Indies, that sort of “imbalance” has often been frowned upon…
Countries should pay their own debts. It’s not Germany’s job to pay them, and it’s not for the British or Americans to criticise the Germans for not paying them. If we are all so keen that Italy’s debts should be paid off by some other country, then we should be volunteering to do it ourselves.