As the mess in Europe gradually gets worse week after week, we move closer and closer to the dreaded “transfer union” where a series of massive bailouts send money from the prosperous North to the collapsing South. But even as more and more observers begin to see this as the only possible outcome, powerful voices within Germany show little willingness to accept what the French, the Italians, the Spanish, the Greeks and the Portuguese (not to mention the Americans) say is the only rational thing for Germany to do.In a recent statement, the president of Germany’s Bundesbank has reacted extremely skeptically to the bailout plans floated by the European Central Bank. The Financial Times reports:
[Bundesbank President Jens Weidmann} also criticised actions taken by eurozone governments as “inconsistent”, and warned that their plans to involve private sector banks in rescue plans for Greece could add to the eurozone’s woes. Such private sector involvement, he said, could undermine market confidence in the eurozone’s crisis-fighting tools such as the rescue fund, the European financial stability facility. […]
Mr Weidmann said current Italian interest rates levels were “not such a big issue” in the short run. “What we are facing in Italy is an acute confidence crisis, and only the Italian government can resolve that crisis.”
Europe is stuck. While a German bailout appears increasingly necessary to keep the European economy intact, Germans have been understandably hostile to the proposition that their hard earned, hard saved money should be used to bail out the spendthrift Greeks and Italians. (Actually, a lot of it will go to bail out spendthrift German bankers, but don’t tell the Germans that: it would only confuse them.)This isn’t merely a matter of the man on the street complaining about the Europhilia of German elites — hostility to foreign bailouts is a powerful force in the political and business sectors as well. The head of the highly-respected Bundesbank has clearly not caught a case of bailout fever, and this skepticism runs across the political class.Chancellor Merkel on the whole is doing the only thing possible: holding on tight between the devil of German public opinion and storm whipping the deep blue sea of European financial markets into a foam-flecked flood. Sooner or later, something will force her to make a dramatic choice. From her point of view the bigger the emergency the easier it will be to act: the more everyone is in despair and the more something obviously has to be done quickly, the more ability she will have to push something decisive.She herself may not know what that ‘something decisive’ will be: that depends on the precise shape of the dilemma facing her when the European hurricane reaches its peak.This is perhaps not the best way to run the world’s largest economic bloc, but at the moment there are no alternatives in view.