When will politicians finally accept that their ideology of cheap money has failed?
A low-interest-rate policy after the dot-com frenzy encouraged the housing bubble. The government-sponsored housing boom led to a banking meltdown. And the fight against the banking crisis resulted in the sovereign-debt mess. Now, because it is forced to invest in toxic debt, the European Central Bank is set to lose its independence. A currency crisis is imminent. Already, former Bundesbank President Axel Weber and the ECB’s chief economist, Juergen Stark, have resigned in protest.
Where does that leave German taxpayers? First, the culture of monetary stability is in peril. Second, the German share of the so-called assistance packages for the euro area amounts to almost 300 billion euros ($416 billion), which means a liability risk of about 3,600 euros per capita. Third, when euro bonds inevitably come along, they will increase the interest expenses of Germany by as much as 40 billion euros a year. And fourth, tax increases loom to cover the assumed liability risks.
Those scenarios are simply unacceptable for German taxpayers. The measures taken by European governments are neither fair nor effective. We should finally stop trying to fight old debt by issuing new bonds. Politicians must find the strength to admit that they have gone the wrong way. Increasing the lending capacity of the European Financial Stability Facility and the plan to establish a permanent European Stability Mechanism will only take us further in the wrong direction. Instead, governments need to turn around.
No More Bailouts
To this end, the European Union should grant no further bailout loans to Greece, which must start negotiations with its creditors as soon as possible to finally restructure its public debt. Sovereign defaults are nothing new. From 1998 to 2008, we witnessed 13 of them, according to Moody’s Investors Service. Creditors lost on average 50 percent of their claims. The International Monetary Fund, the London Club and the Paris Club are certainly institutions that can moderate and assist in negotiations to restructure debts. In addition, banks and insurance companies have been aware of the current Greek problems for years. And according to a recent report by Goldman Sachs Group Inc., most banks could cope with a “haircut” better than is commonly assumed.
Taxpayers as Shareholders
That isn’t to belittle the consequences of a writedown. Restructuring Greek debts would certainly melt the equity of many banks. To let shareholders, rather than taxpayers, bear the losses from banks’ investments in sovereign bonds is just fair. If those losses make it necessary to recapitalize certain lenders, this might be done by taxpayers. In such cases, taxpayers would become transitional shareholders, which would be cheaper in the short term and more promising in the long term than just protecting existing shareholders from losses.
Greece has shown how devastating a policy of cheap money can be. With the euro in reach before Greece joined the currency bloc in 2001, the nation’s savings rates plunged from the late 1990s, while its current-account deficits were consistently large. From 2000 to 2010, Greek unit-labor costs increased by more than a third. About 17 percent of the workforce is employed in the public sector, which puts Greece well above the average of industrialized countries.
Money for Nothing
According to figures from the Organization for Economic Cooperation and Development, Greek civil servants earn as much as 40 percent more than workers in the private sector, while their working hours are fewer. Making matters worse, public statistics are rather unreliable and there are no efficient tax-collection procedures. The government can’t even give detailed information about its scattered real-estate holdings. The Greek railway company has kept prices stable for more than 10 years, while its debts have risen to about 10 billion euros.
With Greece caught in such an unsustainable way of life, it would be reckless for Europe to cover it all up by granting new bailout loans. If there is no restructuring of Greek debts and if foreign taxpayers are made fully liable in the end, then Greece will lose, for decades, any incentive for fiscally responsible behavior.
It’s not too late. Debt-restructuring negotiations would give a clear signal that the patience of Europe’s taxpayers is limited. In addition, the implementation of a “debt brake” in the constitutions of all EU member states would provide new confidence for creditors in the long run. Germany has already enshrined this in law.
The restructuring of Greek debt shouldn’t be postponed by expensive rescue packages. It is a welcome sign that the German coalition of Christian Democrats and Free Democrats is now seriously considering a Greek default scenario. Only binding budget rules can prevent the euro area’s taxpayers from becoming the lenders of last resort for governments.
(Karl Heinz Daeke is president of the German Taxpayers Association in Berlin. The opinions expressed are his own.)
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