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.