Well, about 99% of the world’s bankers, politicians, and finance ministers are demanding that the ECB step up its purchases of sovereign debt. Basically anyone who will make money, gain power, retain their jobs, etc., has voiced their desire to see the ECB change the rules yet again, and grow their balance sheet to support the sovereign debt (and banks) of nations that are insolvent or bordering on insolvent.
The only problem, so far, is that the country with the money and credibility is still saying NO. German 2-year bonds yield 0.34%. That is a fraction of the ECB’s overnight rate. France, by comparison trades at 1.37%. Maybe someone should listen to the one country that has been able to manage its credit?
The issue seems to be print and all is good, or don’t print and risk disaster. Neither of these views are necessarily true. Without a doubt, printing, and buying massive amounts of sovereign debt, would give a short-term benefit to the markets and to the politicians. Yet, there is no evidence that it would help longer term. The EU and ECB have changed, bent, or broken rule after rule, and the consequences have been universally bad. They let countries in that didn’t really meet the criteria. They let annual budgets slip. The ECB changed rules so that they could lend to countries and banks that were below investment grade. Every time they have broken a rule to get a solution to a “temporary” problem, it has turned out that only the solution is temporary.
These rules were designed for a reason. They were done when markets were calm in order to prevent a disaster. Rather than sticking to the rules, which may have prevented a disaster, they have run roughshod over the rules and made the problem worse and worse. Greece not being allowed in would have been good long-term. Not allowing annual deficits to go above agreed amounts would have been good. It is even now clear that letting Greece default in the summer of 2010 would have been good. Instead, they have spread the problems around, given no real reason for a country to fix their problems (most of Greek bailout money gets paid back to the ECB and EU banks), and dragged country after country into the mess. Spain is back to close to 6% in 10 years and France has made so many problems and demonstrated so little respect for lenders that it now risks joining the cusp countries.
Germany realizes that once this rule is broken, there is no going back. Sarkozy, Obama, Putin, and others have all crossed the Rubicon and are waving Germany over, telling them it’s not so bad. The country with the most to lose by breaking this final rule is going to think long and hard about it.
I have seen many people explain that they need to print money to save the currency. The reality is that “printing” and “saving the currency” have rarely been used in the same sentence. I understand the logic in this case, but I am left with a nagging doubt what this will do longer term. And that is the main problem with “printing” their way out. In spite of universal demands to print, I have not seen a compelling case that analyzes the potential downside of printing and how to address them. For once, Europe needs to pause, and figure out what the repercussions of their actions will be. Is inflation real? Will the ECB be able to print so much money without affecting the entire system. Will they need to move from sovereigns to banks? Is there a course that might not be as appealing short-term but be safer long-term?
The EFSF is a prime example of what Europe has been doing wrong. Not since Obama was handed the Nobel Peace Prize has anything received so much premature unwarranted praise. The EFSF (in all its forms) is always announced with great fanfare, but it is never designed to work. It is designed to sound good, but not to be implemented, and it has never been clear to me, that even if it was implemented, that it would work.
The EU, not just Germany, needs to sit back and figure out what can really be done. What are the options. What are the risks and benefits of each path. There are 10 countries that are members of the EU but don’t use the Euro. There are options. Some may be more painful than others in the very short-term, but some lead to a path that is sustainable, others just get us through one more bonus cycle and maybe some elections.
It may also be worth seeing how the technocrat puppets actually perform before jumping all in as well. The markets are happy so far, but we haven’t really seen a reaction from the people, and as initial rhetoric and fear starts to subside, the realizations that leaving the Euro may have more positives than negatives, could change political sentiment in a hurry.