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€gads!

Merkel didn’t say yes and can’t say no to bailing out the Greeks

Sep 26, 2011, Vol. 17, No. 02 • By CHRISTOPHER CALDWELL
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European leaders’ preferred solution of last resort—a eurobond that would turn Greece’s debts into Germany’s—is highly unpopular in Germany. To understand why today’s Germans object to eurobonds is not hard—you have only to understand why Americans of the 1980s, rightly or wrongly, objected to welfare fraud. This being Europe, popular opposition normally poses few obstacles to the country’s governing classes. But the conviction is growing in Germany that even the modest European bailouts that have taken place thus far are outright illegal. And they are. 

The major European Union treaties since Maastricht have “no bailout” clauses, meant to keep the EU from turning into a “transfer union.” The two packages of loan guarantees offered to Greece raise Germany’s borrowing costs and lower Greece’s. These guarantees will likely need to be paid out. On top of that, the European Central Bank has undertaken a plan to buy the bonds of struggling countries, and these purchases are made with funds backed up by the AAA countries. This summer, when Italy’s bond yields began to rise, the ECB head Jean-Claude Trichet extended the program to Italy, which has a nearly $2 trillion bond market. 

In early September, the German constitutional court ruled on a suit brought by a group of distinguished economists and law professors against German participation in the various euro bailouts. Handed a gun and asked to murder a currency used by half a billion people in 17 countries, the German judges demurred. They did insist, however, that any further bailouts be subject to approval in the Bundestag, which dooms the prospects of a eurobond for the near future. Two days later Jürgen Stark, the chief economist and the top-ranking German at the European Central Bank, resigned, three years before his term was scheduled to expire. According to the Frankfurter Allge-meine Zeitung, which has good relations with Stark, he “no longer wished to carry the responsibility for buying government bonds through the ECB.” The Germans appear ready to take their macroeconomic ball and go home.

You begin to suspect eurobonds might be a very bad idea when you note the mockery and ad hominem scorn heaped on those who oppose them in public. Look at the headlines in the weekly Die Zeit: “The Fearmongering of Eurobond Opponents,” “The Weak Arguments of Eurobond Opponents,” and so on. Those who worry about German yields rising should admit that, even with eurobonds, yields would scarcely be higher than they were in the 1990s, Die Zeit thunders. Maybe that’s true. But the 9 percent German bond yields that existed in 1990 and a 9 percent bond yield today would be two very different animals. And anyway, as the wisest economists writing on the subject have understood, the argument over eurobonds is about sovereignty as much as efficiency. One of these, Daniel Gros of the Centre for European Policy Studies, writes that eurobonds violate the principle of no taxation without representation, by “holding taxpayers in thrifty countries fully and unconditionally liable for spending decisions taken in other countries.”

A subtler—and perfectly correct—argument in favor of introducing eurobonds is that, in her own sneaky way, Merkel has already introduced them. Sigmar Gabriel, chairman of the Social Democrats, refers to the various guarantees in which Germany has participated as “Merkel-Bonds” and says they are a de facto eurobond. He is right: Germany is putting its credit rating on the line for debts that Greece and other countries have incurred. But there is a distinction here that resembles the one between gay marriage and civil unions. Even if Merkel and her foes are arguing over a word, not a thing, the word is all-important. It is the difference between a grudging we-can-give-you-this-as-a-favor-if-you’re-going-to-grouse-about-it and full recognition as by right. eurobonds are a scheme whereby wily European politicians want permission to pursue ad hoc solutions with Germany’s money. Thus far, Germany has not given it to them. 

Wen in Rome

Over the summer Germans were given a graphic illustration of how much debtor countries can be trusted with AAA countries’ money. Italy has—let us repeat it and shudder—about $2 trillion in outstanding debt. This has not generally been seen as such a big problem, for two reasons. The first is that relatively little of Italy’s debt is owed to foreign creditors. The second, not unrelated, is that Italy’s finance minister, Giulio Tremonti, is trusted by the markets. But Italy’s premier, Silvio Berlusconi, got embroiled in a scandal that involved lurid stories of his making “bunga-bunga” with very young call girls. He seemed erratic. He quarreled with Tremonti. And bond dealers grew nervous. 

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