Why is Angela Merkel so reluctant to do what it takes to save the euro? Take a look at an open letter that 160 German-speaking economists published in the Frankfurter Allgemeine Zeitung today.
The economists, who include the president of the influential Ifo Institute for Economic Research Hans-Werner Sinn, are pretty clear about what they think of the partial plan agreed at last week's European Union summit that funds from the future European Stability Mechanism should be used to directly bail out euro area banks, with less stringent conditions: They hate it.
"Banks must be allowed to fail," the economists say, and they make a fair argument. If investors make a decision to loan money to commercial banks for profit, say Sinn and company, then they alone should take the fall if banks default. To do otherwise, the letter says, is simply to subsidize Wall Street, the City of London and a few German investors and troubled banks.
They're right about that, of course. The bank bailouts that accompanied the financial crisis around the globe have left us all knee deep in moral hazard and queasy about whether financial aid is going to those who deserve it. It's also a powerful line that plays into popular hostility toward highly paid bankers.
It's very likely that Merkel -- who faces a re-election campaign next year -- will pay a political price for every concession she makes toward shared German liability for Greek, Spanish and Italian debt. Today she seemed to backtrack from the EU summit commitment in comments to reporters.
The question the German economists don't ask or answer in their letter, though, is the true bottom line: Which will cost Germans more, and which will do more damage to Europe? Is it helping to guarantee Greek and Spanish commercial bank debts? Or is it inviting a meltdown of Europe's financial system?
Big sums of money are involved either way. But there's a significant risk that letting some of these banks go to the wall would take down the French, German, British, U.S. and other banks that lent to them too, triggering a chain reaction. Similarly, transferring all risk onto creditors would drive up the cost of borrowing throughout the sector, endangering more banks. So just as concern that the euro area may not be willing to go on bailing out Greece has driven up the yields on Spanish and Italian sovereign debt, so driving some commercial banks to default would immediately drive up borrowing costs for others.
The euro area might well not survive that wreckage in any recognizable form, and the political damage done to more than 50 years of European Union integration would be deep.
That may be why another group of economists and policy makers from around Europe, endorsed by former German Chancellor Helmut Schmidt and the legendary European Commission President Jacques Delors, put forward a plan of their own just before the EU summit. They proposed a banking union and a European debt agency that would allow euro area countries to borrow using common bonds, and the more such debt they took on the more control they'd lose over their national budgets.
In other words, more political and fiscal integration, or as Delors and Schmidt put it, "completion of the euro." Increasingly, that appears to be the choice: Finish the euro, or watch it crash.
(Marc Champion is a member of the Bloomberg View editorial board. Follow him on Twitter.)
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