Friday, December 24, 2010

Another Bad Idea

From today's Open Europe news summary:

German Finance Ministry outlines new eurozone bailout institution;

Euro must be based on “German stability interests” as concession for

Sueddeutsche reports that a leaked position paper has revealed that the German Finance Ministry has drawn up proposals for a new body, named the “European Stability and Growth Investment Fund”, to manage the permanent eurozone bailout fund planned for 2013, the European Stability Mechanism. If granted loans from the fund, countries would be required to provide 120% in collateral in the form of gold reserves, stakes in companies, or revenue rights, the newspaper said. The fund would also be able to buy existing European government bonds, freeing the ECB from this task.

Reuters quotes the Ministry’s paper saying that Germany will affirm its “national interest” rests in maintaining the single currency. The euro, however, must “orientate itself on German stability interests” as a “concession to Germany, as the largest economy in the euro zone, serving as an anchor of stability.” According to Sueddeutsche, the new fund would in principle have access to “unlimited refinancing” in order to secure the health of the single currency. The Ministry confirmed the existence of the paper but said it had not approved the proposal, nor had the German government.

To quote a portion of the above report, the "new fund would in principle have access to 'unlimited refinancing' in order to secure the health of the single currency." This just does not make any sense. Where will the fund get the Euros for this "unlimited refinancing"? It is obvious that the European Central Bank will print the money. This will in no way strengthen the Euro, but will debased it. Further down in the same news summary was a report that Bloomberg News was suing to obtain information that the Greek government had used derivatives and swaps to hide the magnitude of its real debt. We must remember that the fund would be lending not to owners with their own financial assets at stake but to politicians and bureaucrats temporarily placed in powerful offices. The primary goal of such people is to secure their own jobs and their own well-being by buying off powerful internal constituents. Finally, the very idea that Europe should bail out failing economies reveals a complete lack of understanding of the law of moral hazard and the real purpose of a market economy. Prosperity is NOT secured through taxing profitable enterprises--even if indirectly through currency debasement--in order to allow unprofitable enterprises to continue. This is a prescription for capital consumption on a massive scale, because politicians and bureaucrats will have no objective criteria to determine where the "unlimited refinancing" line can be drawn.

Patrick Barron

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