There will be no solution to the euro problem without the European Central Bank (ECB) becoming the borrower of last resort for sovereign debt. But the ECB has consistently refused to consider that role. Yet this is one of the key roles a central bank plays for individual countries. There are legal restrictions on doing so that would have to be changed. But a determination by the ECB and the eurozone members to have the ECB take on that role would have to proceed changing the law.
Martin Sandbu and Ralph Atkins report that Jens Weidmann, head of Germany's central bank, the Bundesbank, is publicly taking a hardline role against the ECB becoming a borrower of last resort for eurozone sovereign debt. (Bundesbank chief champions purist approach Financial Times 11/13/2011)
Contagion is already setting in. Edward Harrison writes in Chart of the day: Contagion spreads to the Netherlands Credit Writedowns 11/15/2011, "At the risk of repeating myself, I have to note that this is a rolling crisis through the euro zone. It will eventually infect every country [in the eurozone] until we get a systemic solution: full monetisation and union or break up. The longer the ECB waits, the worse things will get. No euro zone sovereign bond is safe." (emphasis in original) Today, it's Austria, Belgium, Estonia, the Netherlands and Slovakia that are looking to be the next in line to risk being taken over by Frankfurt Group debt-collector governments. Add that to the five governments already in that condition, and we have more of the 17 eurozone countries that are having sovereign debt problems than those who do not.
In theory, the immediate crisis could be surpassed short of "full monetisation and union". But it's hard for me to imagine it will be, seeing the miserable leadership of Germany's Angela Merkel and France's Nicolas Sarkozy, both toadies for the one-percenters. Wolfgang Münchau writes that "the depressing reality [is] that the eurozone may be only weeks away from a financial collapse". (The only way to save the eurozone from collapse Financial Times 11/13/2011) And that may be optimistic!
Merkel's CDU/FDP center-right government clearly prioritizes saving the large banks from the consequences of their own poor risk management and from the actions of poorly-regulated bond speculators. Merkel and Nicolas Sarkozy have refused to directly address the banking problem, because facing it would likely mean placing some major banks into bankruptcy, thus wiping out the stockholders' investments, and reorganizing them as adequately-capitalized, adequately-regulated institutions. Instead, they have pursued stopgap measures that are basically aimed at shifting more and more of the sovereign debt liability onto public institutions and eurozone taxpayers. They have even been begging the BRIC countries (Brazil, Russia, India, China) to pitch in to help bail out the current situation.
As Martin Wolf writes, Merkel is aiming to save the eurozone in its current form, though contingency planning is obviously underway - though almost certainly inadequate, given their record in the crisis so far (Europe must not allow Rome to burn Financial Times 11/15/2011):
... when Germany's Angela Merkel, chancellor of Europe’s most powerful state, calls "for Europe to build a 'political union' to underpin the euro and help the continent emerge from its 'toughest hour since the second world war'" I take her seriously. I have little doubt, too, that the majority of the German business and political elite believes that the survival of the euro and of a united Europe is in the country’s interest. The question is whether they are prepared to pay the price.See also Tony Czuczka and Brian Parkin, Merkel Urges Overhaul of European Union Bloomberg 11/14/2011.
The "price" to which Wolf refers seems to be the financial burden Germany and German taxpayers will be willing to carry. But Germany under Merkel's government along with her French partner Nick in posing severe conditions on other EU countries. As Wolf puts it:
Confronted with turbulence in the provinces, the eurozone has sent in new governors. In place of the wayward George Papandreou, Greece now has Lucas Papademos, former vice-president of the European Central Bank. Instead of the unruly Silvio Berlusconi, Italy has Mario Monti, former head of competition policy at the European Commission. Europe is putting in place these new governors in members that have descended to the status of clients. [my emphasis]I've said before that the more time goes on, the more skeptical I am about how much people actually learn from history. The Great Depression brought a real crisis of confidence in democracy itself. Despite the greater durability and longer experience with democracy in so many countries since then, this depression is also bringing a real crisis of confidence in democracy itself. When social-democrats, conservatives and European liberals are all willing to act primarily as debt collectors for irresponsible banks, even to the point of effectively overriding the right of national governments to elect their own leaders and hold democratic elections (e.g., former Greek Prime Minister Popandreou's proposed plebiscite on the ruinous austerity measures which the EU's Frankfurt Group blocked), the breakdown in parliamentary democracy is becoming a reality.
Continuing the eurozone in this form is no longer consistent with the health of democracy in Europe. Watching the social-democratic Chancellor of Austria this week scrambling to implement neoliberal austerity measures on the mere rumor that the badly-discredited Standard & Poor's rating agency was considering downgrading Austria's credit-rating is one more sad example of how elected officials of the major left and conservative parties are shamefully ceding their authority and responsibility as leaders of democratic countries to what Paul Krugman calls Men In Suits who don't actually know what they are doing.
Yves Smith gives some idea of the risk to American banks in the euro crisis in the wonky-ish On the Dubious Defenses of the Netting of $4 Trillion of US Bank CDS to the Eurozone Naked Capitalism 11/15/2011.
Tags: eu, euro, european union, frankfurt group