by Mitch Feierstein about 11 years 6 months ago
It’s a strange world we’re living in. This newspaper reported yesterday that, ‘Britain and the US joined forces to urge Germany to create a central Brussels body that could assume sovereignty over individual countries’ budgets and fiscal policies.’
David Cameron and George Osborne are said to believe that ‘a single currency can only work if the Eurozone creates an effective fiscal union.’ Barack Obama is in on the act too. Everyone, it seems, wants a Euro superstate … except for Angela Merkel, the woman who’d be in charge of running it.
Now this seems like a simple story, only the more you look at it, the more it’s like one of those pictures where you have to count up the number of impossible things: fish flying through the air, roofs with no walls, water flowing uphill. And right now, we’ve got a lot of flying fish.
Point number one, a simple one. Germany can’t bail out Spanish banks. It’s illegal and unconstitutional. I know that democracy has taken a pasting recently – just witness an unelected Italian government or the almost total absence of democratic consultation over the fiscal stability treaty. (Take a bow, Ireland, for remembering that voters matter.) But even in these undemocratic times, the rule of law still matters. Germany is coming under acute pressure to break or bend laws passed in good faith. It is right to resist.
Secondly, another simple point. As a hedge fund manager, I’m charged with looking after money on behalf of my investors. It’s my job to make money when the markets are good, to avoid losing it when they’re not. And one of my rules is the oldest one in the market: you never double up on a losing trade. You don’t throw good money after bad.
That plain good sense has been altogether lost in recent times. Europe has too much debt, right? So what’s the solution everyone’s been talking about? Answer: more debt. Yes, sure, we’ve been hurling money – whether borrowed or printed – at these problems for the past four years. That solution has clearly failed … yet the answer, apparently, is to do the same again, only on a larger scale. That’s craziness, the very definition of insanity.
What makes it worse is that we see the same recycled advisers coming up with the same failed solutions. I estimate that, if you include guarantees, the co-ordinated money printing since 2008 has currently added at least $14trillion to the global money supply. That’s almost one quarter of world GDP. Does anyone really think that if $14 trillion hasn’t solved the problem, more money is going to do the trick? The problems and challenges have been getting worse, not better.
And third, don’t we live in a capitalist world? Where smart ideas are meant to make money, where dumb ideas lose it. Capitalism without bankruptcy is comparable to Catholicism without hell – yet G7 leaders seem ready to gang up on Germany for holding fast to this basic truth. If a Spanish or Greek bank has got itself into trouble by making bad bets with its shareholders’ capital, it deserves to lose everything. If the Spanish government wants to fix its financial system, it should do so with money belonging to its own taxpayers.
And finally, the Elefant in the Zimmer. Germany doesn’t have the money to bail out Europe. In the first place, its debt to GDP ratio is actually worse than Spain’s. It’s about the same as Britain’s, and we’re hardly in fine financial fettle at the moment. Furthermore, those ratios are based on the official debt numbers … which exclude, for example, any notion of pension liabilities, an area where Germany has massively under-provided over the years. The German economy itself is robust, but that country’s pensioners are going to need every ounce of that muscle for themselves.
Merkel is unwilling to bail out Spanish banks – which would be unconstitutional – despite the encouragement of the G7
Personally, I think Angela Merkel is resisting the G7 pressure for some honourable reasons. I think she doesn’t want to break the law. I think she believes completely in the law of capitalist consequences: that the people who make the mistakes need to be the ones to pay for them.
But she’s also a numerate, intelligent woman. She knows that Germany’s financial strength is far from impregnable. The country’s financial capacity is strong, precisely because she and her predecessors have taken care not to overload it – not to do to Germany what Blair and Brown did to Britain. I don’t want a superstate any more than you do. I certainly don’t want a British Prime Minister to be advocating the development of such a state. But fortunately, I think Merkel doesn’t want one either. Can’t finance it, doesn’t want it. Let’s hope she holds firm
I published this in todays Daily Mail