What needs to happen to end the financial crisis in Europe? Today’s newspapers provided no new substantive insight about the ultimate fate of the European Union. What is obvious is that the opposing factions, basically Germany and all the rest of Europe, have not yet found common ground even though only one party is negotiating from a position of strength.
Chancellor Angela Merkel of Germany is the only salvation for the euro zone. Germany has the financial wherewithal to fix the short-term financial problems of the continent with the stroke of a pen.
But why should the Germans bail out their free-spending neighbors? The European have-nots have taken on too much debt over the past few decades feeding their socialistic appetite. Will the Germans step up like they did when they took in their weaker sister, East Germany? It was a complicated process that cost the German people dearly. The answer is, most likely, yes, but only if the needy countries agree to austerity.
It is very easy for Greece, Spain, and Italy to demand assistance from the wealthier Germans without any strings attached. It is reminiscent of populist demands in the U.S. to increase taxes on the wealthy to continue to fund unproductive welfare programs and out of control government spending. The difference is that the U.S. has the ability to borrow and/or print money to pay for its excesses even if the affluent refuse to accept higher taxes.
The Germans are going to hold fast and demand concessions. They are prepared to go to the brink of financial Armageddon to have their way. This is a dangerous game, but Germany is motivated in other ways.
It is clear to me that financial issues are only part of this drama. Germany was defeated twice in the 20th century by other Europeans and a whole lot of help from the United States. Germans are a proud people that still harbor resentment towards their conquerors. The financial problems of Europe are an opportunity for Germany to execute a bloodless coup in the guise of monetary support. One thing is undeniable, Germany will be the unquestioned leader of the Union and the gatekeeper for the continent’s financial resources when this crisis ends. Instead of using bullets and bombs to gain control, the Germans are using their debt capacity.
The media continues to search for answers. What can Germany do to end the crisis? Why doesn’t Germany enable poorer countries on the continent to borrow money and stimulate their economies? The have-nots are now hard-core Keynesians.
Germany is the enviable position of having extraordinary capital availability. In the short run, it will have to backstop the finances of the European Union. Guaranteeing the debt of the European community is the next step. Of course, the European Union will go through the charade of having each member country assume its fair share of debt, but outside investors will not buy European bonds without a German guarantee.
In order to protect itself, Germany will insist that it be the monitor for all funds borrowed by the Union members. It will demand concessions from prospective borrowers (Greece, Spain and Italy); they will need to face severe austerity measures. Any requests to use fund for stimulus without corresponding austerity will be denied. This should sound familiar as the House of Representatives is serving the same role in the U.S. So, the debate about stimulus versus austerity will become moot. Germany will decide if plans are satisfactory and whether a member nation deserves financial redemption.
The same holds true for the banking system. Just like in the U.S., banks are critical to the health of the economy. The first item on the agenda for Germany must be to guarantee deposits throughout Europe. This will effectively end the flight of capital and ameliorate most bank failures, unless Germany determines that a specific bank should fail. Once again, the Germans will oversee this program. Banks with issues will be required to present plans for recovery that will be judged by Germany regulators. After all, it will be Germany on the hook if the situation deteriorates.