As some of us have been pointing out for years, the real threat to the euro was always the bailouts, and never that countries would not be bailed out. The existential threat to the euro was always that if it became an exercise of wealthy and disciplined countries paying for the laxity and errors of others, those wealthy countries would decide to leave or be bankrupted themselves in the process. If Germany agrees to accept responsibility for the debts of other countries, Germany’s creditworthiness will fall, those under the age of about 40 in Germany will be incandescent at the injustice of their having responsibility for trillions in debts that were nothing to do with them foisted upon them, and since the only practical way those younger Germans could escape that responsibility would be for them to leave the euro altogether, that would become a likely (perhaps the most likely) scenario over the medium term. (And that’s before we start considering the reaction of citizens of other states to being told by Germans what they could and could not spend their money on.)
With yesterday’s failed German bond auction, a few other commentators seem finally to be getting it. However, policymakers outside Germany seem intent on getting it ever less. European Commission President Barroso has announced his latest variant of the Eurobonds plan. The Commission says, of course, that it doesn’t intend Eurobonds as a mechanism for resolving the current crisis, but everyone in financial markets understand them as meaning precisely that. The Germans are becoming openly agitated that this same proposal, which they have rejected in terms and effectively had their courts declare would be a violation of the German constitution, keeps being repeated over and over again. Angela Merkel stated: “I find it extraordinarily inappropriate the Commission is suggesting various options for euro bonds today – as if they were saying we can overcome the shortcomings of the currency union's structure by collectivising debt…This is precisely what will not work.” Got that?
Apparently not. And the French aren’t getting it, either. Nicolas Sarkozy’s reaction to the German bond auction failing, because of the threat of debt pooling, is to, err…, propose debt pooling. (Of course! Why didn’t I think of that?) His pet form of debt pooling is for there to be mass purchases by the ECB of Italian, Spanish, Belgian and French government debt — with the ECB’s purchases being underwritten by the Germans. This form of debt pooling comes with the added twist of risking creating high inflation — because, like, that’s going to appeal to Germans. One imagines the Germans figuratively tapping on the heads of Barroso and Sarkozy, calling: “Hello! Hello? Anyone home? We’re standing right here. Are you hearing me – over?”
Some of us (Powerpoint download) have offered solutions that don’t include debt pooling. Every solution – Eurobonds, trillions of EFSF, leveraged EFSF, ECB mass bond purchases – proposed by official agencies such as the US and British governments and the European Commision does amount to debt pooling, a solution that would destroy the euro, not save it, which the Germans have outright rejected, and which is now causing such concern in financial markets that German bond auctions have started to fail. Is it not, perhaps, time the official agencies tried considering some options that don’t amount to debt pooling? Please?