Shut Your Big German Mouth!

Don’t look now, but another EU sovereign debt crisis is creeping up. This can be seen in the effective interest rates currently paid for the obligations of the usual problematic countries – Greece, of course, along with Portugal and Ireland, but also Italy and Spain. The last-named had hoped that it had made it out of the woods – mainly by means of various public-spending austerity measures – and so Spanish financial experts are particularly aggrieved now that it seems the country’s painful fiscal virtue is threatening to be all for naught. One such, C. Pérez of the Spanish newspaper El País, knows who is to blame and issues his accusation today: Berlin sows doubts about debt and the contagion reaches Spain and Italy.

It’s almost like what happened back when the EU sovereign debt crisis first broke in January, after the new Greek government took office and felt obligated to announce that the country’s debt and fiscal situation was much worse than the previous regime had led everyone to believe. Then, Germany for a long time resisted coming to Athens’ assistance, and thereby succeeded in little more than spreading doubts about their fiscal probity to Portugal, Ireland, and Spain as well, before finally in May rallying Eurozone countries to set up a huge and unprecedented EU sovereign debt support fund.

This time the story is slightly different, although the Germans are still the villains of the piece. It has to do with the proposal Finance Minister Wolfgang Schäuble recently unveiled for the establishment of a mechanism to deal with future sovereign debt crises: first, a program of intensified fiscal austerity for the deadbeat country, accompanied by a mandatory lengthening of their debt’s maturity date; then (if that does not work to calm investor fears of a default) intervention with EU funds, but with required provisions for the lenders to get back less than they are otherwise due, i.e. to take a loss on their investment. Schäuble: “The EU was not created to enrich financial investors.”

All that seems reasonable in itself, but in the first place the Germans here are explicitly raising the prospect again of sovereign defaults. That’s supposed to be unmentionable, and when it is mentioned it tends to make investors sit up in alarm and take notice. More importantly, though, the German proposals also amount to a change of the rules of the game for lending money to Eurozone countries; for one thing, before this investors weren’t expected to have to take a loss if the EU and/or IMF had to come in to cover the debts (and the later maturity date is not something designed to thrill them either).

Given that this is the proposal being pushed by Germany, the EU’s paymaster, these investors are naturally adjusting their expectations for such a near-future development now: the Greek, Portuguese, Irish, Spanish and even Italian debt they are holding no longer seems quite so attractive in the light of this likely rules-change, and so we see the effective rates on those debts lately rising up dangerously to levels potentially high enough to ensure that, in effect, they never can be repaid by those countries themselves.

The result: in trying to address the problem of how to handle sovereign debt crises in the future, the EU has come close to bringing about such a crisis in the here-and-now, and has plunged countries which had thought themselves at least on the margins – namely Spain and Italy – squarely back into the danger-zone. It’s no wonder they’re not happy about it. Unfortunately, there’s a limit to how much of substance can be accomplished by secret consultations among the EU member-states. Such a crisis was probably inevitable, given that top EU leaders refused to simply stick their heads in the sand and pretend that such serious international financial trouble could never come around again.

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