Marshall Auerback is not so sure that the wall of money needed to cauterise any Greek default is so readily forthcoming as some suppose.
Trouble in Euro Zone Paradise?
by [email protected]
By Marshall Auerback
The Europeans evidently thrive on instability and the ongoing threat of systemic risk. There is nothing else to explain the renewed hardline stance adopted by both Mario Draghi of the ECB and the German government on fiscal policy, just as the markets appeared to be calming down again.
In response to the question as to whether Greece was a “one-off”, or a deal which would presage similar claims on the part of the other Mediterranean debtor nations, there has been a growing prevailing belief that either the terms demanded of Greece would be so punitive (“pour decourager les autres”) or that, if Greece were to default, a sufficiently large firewall would be constructed by the Troika to ensure that the contagion wouldn’t extend to other countries. This is what Greek economist Yanis Varoufakis has called “cauterize and print”:
Germany’s belated epiphany is that, without a major redesign of the euro architecture, a number (>1) of eurozone member states are irretrievably insolvent. As for the two strategic choices, the first is Berlin’s conclusion that German politics have no stomach for, or interest in, a structural redesign of the euro system. The second choice involves a massive bet in attempting to save the eurozone by shrinking it forcefully while, at the same time, authorising the ECB to print trillions of euros to cauterise the stumps left when the states earmarked for the chop are severed.
Well, the 2nd leg of that strategy seems to be falling apart, even as Greece is slowly being severed from the euro zone (because let’s be honest: Greece has insincerely accepted yet more impossible conditions for implementing another unworkable fiscal adjustment plan, which suggests that both sides are simply playing for yet more time).
In the meantime, the UK’s Daily Telegraph has reported that Germany’s ruling parties are to introduce a resolution in parliament blocking any further boost to the EU’s bail-out machinery, vastly complicating Greece’s rescue package and risking a major clash with the International Monetary Fund. According to Ambrose Evans-Pritchard:
“European solidarity is not an end in itself and should not be a one-way street. Germany’s engagement has reached it limits,”said the text, drafted by Chancellor Angela Merkel’s Christian Democrats and Free Democrat (FDP) allies.
“Germany itself faces strict austerity to comply with the national debt brake,” said the declaration, which will go to the Bundestag next week. Lawmakers said there is no scope to boost the EU’s “firewall” to €750bn, either by increasing the new European Stability Mechanism (ESM) or by running it together with the old bail-out fund (EFSF). (link to article)
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