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Euro Bailout Fund Running Out Of Money

In Europe the debate over the euro rescue plan has been simple. Southern “Club Med” countries and other states in need of bailouts have been begging Germany to shut up about austerity and just give lots of money to its needy European partners — which is to say, themselves. And they don’t want that money to come with a lot of dreary conditionalities and bureaucratic requirements. If they thought they could get away with it, they would ask for suitcases delivered directly to party headquarters with small, unmarked bills.

Germany, meanwhile, has been reluctant to oblige until the neighbors change their spendthrift ways, attempting to avoid spending all its cash on bailouts that, if the neighbors don’t make the reforms they have so far resisted tooth and nail, won’t ultimately do any good. Yet thus far, both sides have taken for granted that Germany can afford the bailouts—the problem is one of will, not of means. But what if even Germany can’t afford the bailouts anymore?

We may now be getting closer to just this eventuality. In a recent public statement, the Institute of International Finance reported that the European bailout fund is now running out of cash, and will now be unable to bail out another big country. From the Wall Street Journal:

“This means that…the Eurogroup’s rescue funds, as currently authorized and structured, will have sufficient funds to help a small economy like Cyprus, but hardly enough to deal with any large country,” the IIF said.

The banking group said rescue funds will increase in November as euro-zone members make additional contributions to the European Stability Mechanism, the currency area’s permanent bailout fund.

This underlines the big fear that keeps German policy makers up at night: at the rate things are going, the bad debts and bank crashes across Europe will soon be so big that Germany and the few other solvent, A-rated countries in the eurozone couldn’t afford the costs of the bailouts required.

To Greeks, Spaniards and Italians at the moment, Germany looks like an inexhaustible store of beautiful euros. But the Germans are increasingly aware that as Europe’s troubles move from small economies like Greece to bigger ones like Spain and ultimately Italy (with Belgium and France not entirely exempt), there may not be enough money in Germany to keep Europe afloat. As in Pharaoh’s famous dream, the seven lean cows in Club Med will gobble up the fat cows in the north.

Germany doesn’t have the ability to keep throwing money at southern Europe as plan after plan fails. And while German taxpayers might, might forgive politicians who spend trillions on a successful bailout of the eurozone, they will never forgive a party which bets the ranch on a bailout that fails.

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  • chase

    There is no alternative to some kind of bailout. If Germany acts more quickly, there will less damage than if they wait until the situation is critical. Richard Posner, nobody’s idea of a lefty wing ideologue, has said that a decision to save Lehman Bros. at the outset of the crisis in 08 would have prevented the crash from being as bad as it was. Mead, even the economist magazine is calling on Germany to act.

    Also, Via meadia readers looking for some additional perspective on the situation in Greece should read this excellent op ed by Paul Krugman. I know most via meadia readers probably don’t like Krugman very much, but the piece is good.

    Here is a quote that punctures some stereotypes of Greece that have been accepted by most American pundits.

    “On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well.”

    • Walter Russell Mead

      @Chase: there have been two bailouts of Greece already. More may well come, but won’t fix things. And the problem with Greece isn’t so much government spending on wasteful social programs as over-employment in unproductive government jobs and government regulations that reward unproductive economic actors who are well connected. As for hard work, it’s true that on paper at least Greeks work long hours, but the extremely low productivity figures, the core of Greece’s problems, would seem to indicate that they aren’t working ‘smart’ or hard or some mixture of the two.

  • chase

    Well said professor.

  • Kenny

    1. If the Greeks work so hard — which personally I don’t believe for a moment — why do they produce so little? It’s far more than low productivity.

    2. “Nor does Greece have a runaway welfare state,… social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, ”

    That’s because a good portion are the public sector jobs are themselves welfare but are not formally recognized as such.

  • WigWag

    It would take a lengthy dissertation to enumerate the myriad ways that Via Meadia’s take on the current economic travails are silly. There’s Professor Mead’s penchant for exaggeration; there’s his proclivity for articulating bold assertions without the resort to actual evidence; when he does present actual evidence, there’s his tendency to wax eloquent about data that supports his thesis while totally ignoring data that contradicts his thesis.

    Perhaps the most prevalent of Via Media’s many mistakes in describing the economic and financial problems in Europe is the Professor’s insistence on seeing the current crisis as a morality play. Germany (and a small number of Northern European nations) are hardworking and frugal; Southern European nations are corrupt, inefficient and profligate.

    As hard as it may be for the morally upright Professor Mead and many of his more stoic readers to understand, economics is not a morality play. It’s not a story in which virtue is rewarded and vice is punished. The market economy is not a religion to be clung to or a deity to be worshipped as so many “conservative” believers do; it is little more than a system for organizing human activity. For the most part it’s a pretty good system although it does have its bad points. It has no moral significance one way or the other. The wealthy don’t “deserve” their wealth and the poor don’t “deserve” their poverty; we accept a system that stimulates inequality because in general, systems that promote absolute equality don’t work although it’s really a question of degree. Canada, Sweden, Norway and Denmark work as well or better than the United States, Cuba doesn’t work at all.

    At its most recent meeting the German influenced ECB remarkably refused to lower European interest rates; the stupidity of this is almost inconceivable. Germany, which has built an export based economy which thrives only because the United States has done its part through the Obama stimulus program to prop up world aggregate demand, refuses to accept its share of the responsibility to reflate the world’s economy. At the same time that it benefits significantly from the stimulus provided courtesy of the American President and Congress, it lectures everyone else like a pedantic old schoolmarm about the virtues of frugality.

    The rest of the EU is far and away Germany’s largest trading partner; now that things have turned ugly Germany feels it has the right to preach to all its neighbors about the virtues of responsibility. It wasn’t complaining when Greece, Spain, Italy and the rest of Europe were running large deficits in part to purchase German exports. Nor was it preaching the merits of fiscal austerity in the post war years when the United States, despite having run up the largest federal debit in U.S. history (as a percentage of GDP), during World War II financed the redevelopment of a destroyed European infrastructure.

    If the behavior of Greece has been odious, the behavior of Germany has been equally odious. Waxing eloquent as Via Meadia frequently does about how industrious the Germans are and what languid sybarites the Greeks and Spaniards are, is a poor substitute for serious analysis.

    As usual Krugman got it right. The editors of Via Meadia should read this and learn something,

  • Snorri Godhi

    “To Greeks, Spaniards and Italians at the moment, Germany looks like an inexhaustible store of beautiful euros.”

    Actually, the Italians and until recently the Spaniards have been contributing to bailouts of Greece, Ireland, and Portugal without getting anything in return.
    That has aggravated the debt situation in both Italy and Spain.

    A Greek default would have been even worse, but since a Greek default is still likely, the best spin that one could put on this is that Italy and Spain have got into deeper debt to buy time for deleveraging.

  • Otiose8

    There’s a common misconception held by the Greeks (and the French, Italians, etc) that they can negotiate their future standard of living with the Germans. This is a delusion.

    It’s just happens that the Germans have been willing to trade more of their short term returns in exchange for long term, and they look so much better off and are able to fund temporary transfer payments to the others.

    German has no where near the resources to finance the current standards for pay, pension, entitlements etc for the rest of Europe on a sustainable basis.

    The Greeks need to bring resources in line with their costs. Blaming the Germans for what is happening is delusional as is the idea that transferring additional money/increasing debt will somehow fix the low productivity predicament most of Europe finds itself in.

  • Steve M

    How is economics not a morality play? Krugman just makes the same assertion without giving any argument whatsoever. Assuming that you consider wealth a reward, and economics as teaching what behaviours lead to wealth, then of course it *is* a morality play, in the sense that it says that if you behave in such-and-such a way you become wealither, and not if you don’t.

  • Eurydice

    The point of Krugman’s piece is that Greece’s problems aren’t new – yet, when Greece had its own currency, it was able to be a viable country regardless of its corrupt government, low productivity and all the other blahdy, blah, blah economic moralists like to shake their fingers at. The markets understood Greece’s credit position and priced it accordingly, and that pricing determined the level of Greek borrowing.

    An historical aside – back when the Euro was being contemplated, a study was done of the change in credit-worthiness of a country when it went from being a sovereign that could print currency to a state that could not. Applying the rules that were used for evaluating our states, Germany (without its own currency) couldn’t score a higher rating than Louisiana.

  • Jim.

    Once again, WigWag’s gone a-trolling. However, elaborating the moral basis of our economic system is worthwhile, so here we go.

    To put it in simple terms: think about our economy as a great big pile of goods and services. People cme up to the pile and contribute their bit, then take what they need and want from the pile.

    Our current system matches up what people can take from the pile to what they put into the pile, through money. This usually creates a self-correcting system. Is there a shortage of a given good or service in the pile? Let people who contribute that good or service take more from the pile, to encourage them to do what others are demanding, and to encourage people who could also contribute that good or service to bring that instead of what they’re currently bringing, that people don’t want as much.

    This approach also controls shirkers; people who bring nothing to the pile, yet want to take. If the amount that gets taken overwhelms the amount people are willing to bring, the pile vanishes over time, and there are terrible shortages. This is inevitable in any system where taking is not dependent on FIRST, giving. This is why Borrowing is looked upon as worse than Frugality; it can collapse the system. It IS collapsing the system.

    That is why our system is a good system, and must not depend on borrowing. Even leaving morality out altogether, if we keep a strong dependence on giving to control taking, it is a stable and self-correcting system. If you include morality in the mix, no system better “gives to each his due”, as the old Roman definition of Justice goes.

    (Feel free to criticize rent-seeking behavior and services of questionable value like “finance charges”. Even with those criticisms, this is the best system anyone has come up with that looks to be maintainable into the future.)

  • thibaud

    Krugman and The Economist are on target.

    Ironic that Via Meadia spends so many pixels railing against “cocooning” and the “legacy media” when VM itself is so often given to fact-free, analysis-light sermons aimed at the faithful.

    Less cocooning and more rigorousness, objective analysis, please.

  • Kris

    Krugman’s thesis (@1) is that Greece was doing OK until it “joined the euro, and a terrible thing happened: people started believing that it was a safe place to invest.”

    I shall be asking Princeton to investigate Krugman for academic misconduct, as he has shamelessly and without credit stolen this line of argument from Dr Eric Stratton: “You {messed} up… you trusted us!”

  • thibaud

    #10: More loonytunes commentary here: “That is why our system is a good system, and must not depend on borrowing”

    So the Paulista/TP nuts have moved beyond goldbug-ery to railing against _credit_. Wow.

    If anything sinks the Romney campaign this fall, it will be his nutty friends in the Flat Earth Society, aka the TPers.

  • Charles R. Williams

    It is a mistake to look at Europe as a morality play. Germany’s prosperity is in large part dependent on mis-priced credit risk just like the US economy of the 2000s. Germany needs “profligate” Italians, Spaniards and Greeks to buy its goods. That said, it is the Italians, Spaniards and Greeks who will pay the heavier price when their governments default. The Germans do not “owe” them anything. Even so the Germans will pay a heavy but smaller price when it happens. Sadly, it is the little old ladies in Greece that will be digging through garbage cans to find their next meal.

  • MRW

    The ECB issues the Euro. How can it run out of money? Completely nonsensical.


    Eurydice, smart comment at:
    June 18, 2012 at 2:52 pm

  • Otiose

    Jim. nice approach to help the open minded understand basic economics.

  • Jim.

    Thibaud, the offer stands, no matter how much you keep up the whining and yapping against us… feel free to join forces with the TEA Party any time you feel like joining a coalition that could actually help bring down Big Finance, by breaking up TBTF banks.

    Come on t, what else could you hope to accomplish with the House, Senate, and Presidency all in the “R” column as of January next year?

  • thibaud

    Jim – if that happens, and it might well happen, then I’ll go overweight BTU, ANR and the other coal stocks and sell my holdings in RGR.

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