[adabsurdo]

depression would be more accurate.

the problem, i think, is that there is a core contradiction at the heart of the euro system:

1) you can't have a currency union, without a fiscal union;

2) you can't have a fiscal union, without a true political union;

3) the euro area is a currency union with neither a fiscal or a political union.

in other words, for a currency union to work well, you need to shuffle money around. but you can't do that without political legitimacy, or if people feel like the money is going to "them", as opposed to "us".

The leaders who created the euro were trying to go about it the other way around: currency union would lead to fiscal union, which would lead to political union. but now, in a recession, with things going bad, they are finding that, in fact, they would need all three for any part to work correctly.

why are the Germans refusing to let the ECB be the lender of last resort? the core reason is that they see, correctly, that this would put them on the hook for the past and likely future mismanagement of the Greeks and Italians. of course, they can't say this publicly, so instead you hear all sorts of nonsense, hyperinflation this and weimar that.

or, to put it another way, would the Germans let this kind of thing happen to other Germans? I don't think so! Greeks and Italians are "them", and in bad times people feel less generous and fall back to the "us".

but at the same time, of course, their refusing to let the ECB, as it were, bail out the Greeks and Italians will inevitably lead to their default, exit from the Euro, and who knows what after that. at the very least, expect nationalist parties everywhere to rise in the polls.

let's just hope that we're not rebooting to the early 20th century.

[danmaz74]

The point is that Germany IS going to pay for the crisis anyway, because if Greece, Spain and Italy defaulted, the German banks would lose hundreds of billions of euros of German money. The European economy would enter a crisis that would last years (decades?), and most of German exports are to other European countries - thinking that they could have a great economy amid a European depression is just stupid. And I'm not even thinking about the possibility of wars should become "everyone for himself" in Europe again.

So, it isn't a matter of self interest vs. generosity: it is a matter of understanding that it would be MUCH less costly to make the ECB lender of last resort now than to wait and just hope that things will fix themselves. Moreover, in Italy the only real risk is that of interest rates on its massive debt going too high: Italy already has a primary budget surplus, with "normal" rates the debt would already be shrinking.

[umarmung]

Excellent post.

1) you can't have a currency union, without a fiscal union; - correct.

2) you can't have a fiscal union, without a true political union; - unknown, but history is on your side.

3) the euro area is a currency union with neither a fiscal or a political union. - correct.

There may be a way to incentivise independent states to act in their collective interest and thus create a fiscal union without a true political union. However, if there is such a way, it has certainly never been applied to date for the Eurozone. This is the grand experiment ongoing in the EMU.

In a sense, the experiment not only already failed, but failed from the outset due to states choosing to ignore leverage rules in the 1997 Stability and Growth Pact, including even Germany.

The probability of this ending well, or without Germans paying in some shape or form and potentially severely against their long-term interests, is low.

If Germany had any sense, they will be making preparations to leave at any time, possibly taking the few remaining Germanic (+Switzerland) and Scandinavian creditor nations with them too.