To Save the Euro we Must Destroy Germany

Yesterday German Chancellor Angela Merkel came flat out and said, "To save the Euro we must Destroy Germany".

Well not exactly, but she may as well have because that is the implication. This is what she did say: Germany Is Ready to Cede Some Sovereignty to Save the Euro

Chancellor Angela Merkel said that Germany is ready to cede some sovereignty to strengthen the euro area and restore confidence in the common currency.

European Union treaty changes to strengthen EU institutions and patrol tighter budget rules are needed “to make the euro zone more crisis-proof,” Merkel told reporters in Berlin today at a joint briefing with Irish Prime Minister Enda Kenny.

“Germany sees the need in this context to show the markets and the world public that the euro will remain together, that the euro must be defended, but also that we are prepared to give up a little bit of national sovereignty,” Merkel said. Germany wants a strong EU and a euro “of 17 member states that is just as strong and inspires confidence on international markets.”

Not Merkel's Decision

For starters Merkel is saying what she wants. It is debatable if that is what Germany wants at all. I rather doubt it.

Moreover, even if it is what Germany wants, it is not Merkel's decision. Such decisions, as the German supreme court has ruled are up to voters of Germany, not politicians with an axe to grind about what they want.

If German voters want to cede power and form a European nanny state, then so be it. But it will be the end of Germany and the end of Europe as well should they do so.

Desperate Attempt to Save Something Not Worth Saving

As the crisis lingers the cries for more intervention get louder and louder, even though the massive intervention to date has only made matters worse.

Ambrose Evans-Pritchard highlights the cries for intervention in Latin showdown with Germany over ECB

The EU's €440bn EFSF bail-out fund was supposed to take over on the rescue task, relieving the central bank. It has been a disastrous flop, unable to raise money itself at a viable cost after toying with leverage plans that greatly concentrate risk for creditor states. The net effect has been to accelerate contagion to the core.

Germany's constitutional court has ruled that "open-ended" and "automatic" liablities violate the country's Basic Law. So only the Germans can save monetary union, yet the Germans cannot legally do so. Europe's crisis has reached an impasse, the result of the original design flaws of EMU.

Even so, a growing chorus of economists within Germany itself is calling for a strategic change. Wurzburg professor Peter Bofinger wants the ECB to cap Italian and Spanish yields.

"We are in an emergency situation; this isn't plastic surgery. If worse comes to worst, the ECB has to act before the financial system falls. And if it acts, it should act properly and set an upper limit for sovereign yields. It's naive to believe that Italy can solve its problems on its own. Structural reforms can't be implemented overnight."

Dennis Snower, head of the Kiel Institute, said the ECB must act to stem the crisis, even if this means straying into fiscal policy. Thomas Mayer from Deutsche Bank said Italy's new government will fail unless the ECB buys time by holding down yields, perhaps as low as 5pc.

Euro Experiment is Over

Pritchard concludes with a couple of paragraphs that I whole-heartedly endorse...

David Heathcoat-Amory, Britain's former Europe minister, said Berlin will do whatever it takes to try to save EMU.

"The Germans will pay up, accept eurobonds, and mobilise enormous firepower. But this won't save monetary union in the end because it is not a debt crisis. It is a currency crisis. The weaker states are uncompetitive and you cannot force them to deflate their way back to competitiveness by cutting wages 30pc. The EU elites won't admit it, but the euro experiment is over," he said.

Merkel is willing to destroy Germany (and Europe) to save something that is doomed anyway.

Top Orwellian Comments Of All Times

• An American major after the destruction of the Vietnamese Village Ben Tre: "It became necessary to destroy the village in order to save it."
• Vice President Joe Biden: "We Have to Go Spend Money to Keep From Going Bankrupt."
• President George W. Bush: "I've abandoned free-market principles to save the free-market system."(For a discussion please see The Most Redeeming Feature of Capitalism is Failure)
• Nancy Pelosi said "We have to pass the health care bill to see what's in it." (YouTube Video)
• Larry Summers says "The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending." (Reuters) 

We can safely add "To Save the Euro we Must Cede Sovereignty" to that list.

Unlimited Supply of Hare-Brained Ideas

There have been more hare-brained ideas in the last 6 months on how to save the Euro and the global economy than in the prior three years combined.

Ceding sovereignty to save the unsavable is one of them. A leveraged EFSF is another hare-brained idea. It has already blown sky high.

Here are some more examples.

• Alan Beattie proposes the ECB lend money to the IMF so that the IMF can take on Eurozone credit risk, in order to get around ECB statues regarding bailing out insolvent nations. Allegedly that needs to happen or it will be another Great Depression. (Financial Times)
• In one of the looniest ideas in history, economist Brad DeLong proposes "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip. The Federal Reserve Needs to do so now.” (DeLong Typepad)
• In an absurd idea since abandoned, EU officials actually proposed that rating agencies be barred from rating countries with "excessive volatility"

Quack Ideas

In regards to Beattie's proposal EuroIntelligence writes

In the never-ending search for quack solutions to the eurozone crisis, European leaders come up with ever desperate attempts. After the silly idea of leveraging the EFSF, the G20 summit discussed – and failed to agree on – the notion of leveraging the EFSF through the IMF’s special drawing rights (SDRs).

Alan Beattie writes in the FT it is illusory to think that one could bolster the EFSF to €1 trillion through SDRs as such a decision would require approval by the US Congress, with a success chance of between low and zero, he writes. He concludes that the only thing that currently prevents a crisis resolution is ideology. The ECB could lend money to the IMF, which in turn could set up a fund to buy Italian debt.

Interventionists Man the Barricades

In response to DeLong's proposal, my friend Pater Tenebrarum comments in Interventionists Are Manning The Barricades

Another quite funny missive reaches us via the always amusing Keynesian statist Brad DeLong, who argues that given the euro area crisis escalation, the US Federal Reserve should immediately proceed to crank up its printing press. In terms of sheer lunacy his proposal is hard to beat.

DeLong approvingly quotes an article by Paul Krugman, who bemoans the possibility of the eurocratic moloch falling apart:

"I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn’t raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind."

First of all, who's to say that the euro is worth saving? If saving the euro depends on the central bank rewarding the fiscal profligacy of member nations by monetizing their debt, then obviously we'd be better off without the euro. These nations could then attempt to inflate themselves to prosperity on their own.

Regarding the ECB rate hike earlier this year, it is really hard to argue that it makes any difference whatsoever if the administered interest rate sits at a minuscule 1.25% or a minuscule 1.5%. How can that have any bearing on the insolvency of peripheral governments? Moreover, whether the rate is at 1.25% (where it now is again after the recent rate cut) or 1.5% – in both cases it is well below the official inflation rate of 3%, in other words it represents a negative real interest rate. The ECB is definitely not pursuing a tight monetary policy either way.

The euro system has proven a badly constructed self-destructive system, just as its opponents have claimed from day one. In fact, they have pointed this out well before the euro was introduced. Alas, it does not logically follow from this that it is worth attempting to 'save' it by means of inflation, which is what all the above quoted people evidently want.

Currency Expiration Looniness


For sake of completeness, I need to point out once again Gregory Mankiw's inane proposal to save the economy by expiring 10% of Money supply every year (see Time For Mankiw To Resign)

GDP Targeting Looniness

I also need to point out the preposterous idea by Christina Romer who proposes the Fed institute GDP targeting in which she says Dear Ben: It’s Time for Your Volcker Moment.

For starters the Fed cannot spend money, it can only lend it. Thus the Fed has at best an indirect affect on GDP.

Interest rates are at 0% and money is stacking up at the Fed as excess reserves. In such conditions, the Fed has no affect on GDP. However, the price of crude is back over $100.  Food prices are up as well. The Fed has destroyed those on fixed income.

The Fed already has a dual mandate. A dual mandate is stupid enough in and of itself. The reason is the Fed can control at most one variable at a time. For example, the Fed can defend an interest rate target but it then loses complete control over money supply. It can target money supply but lose control over interest rates.

The Fed cannot do a damn thing about jobs other than indirectly. Now Romer appears to seek a triple mandate that is quite frankly economically impossible. 


How Economic Incompetents Rise to Fame and Power

Inquiring minds may be asking "How the hell did such a blazingly incompetent economist ever get picked to Chair Obama's Council of Economic Advisers and why is she on Obama's Economic Recovery Advisory Board?"

Those are excellent questions. The snide answer would be to place the blame on Obama. However, President Bush also had incompetent economic advisors.

The answer is more fundamental. Romer was picked precisely because she was incompetent, not in spite of her incompetence. She says the things government wants to hear.

1. We need to print more money
2. We need to spend more money
3. We do not need to worry about debt
4. The "Free Lunch" exists
5. Government is the savior

In short, Romer preaches exactly what presidents want to hear.

Addendum:
I added to my list above one of the biggest Orwellian statements in history: Nancy Pelosi said "We have to pass the health care bill to see what's in it." (YouTube Video)

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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