The European Central Bank’s Outright Monetary Transaction was opposed by the German Bundesbank on the ground it amounts to refinancing the debts of profligate states.
Critics of Germany often say the Bundestag is erecting hurdles for the creation of the ‘United States of Europe’; i.e. – greater integration among the member states similar to the United States of America.
The key point the critics seem to miss is that even in the US, the Federal Reserve can’t extend credit to highly indebted states, even if they are on the verge of default (like California). Also there’s no provision for debt mutualization or joint liabilities in the US, the latest measure advocated by European Council President Herman Van Rompuy.
Germany will never be out of the negotiations even after the ECB’s OMT announcement though it has technically the same weight as Malta, one vote out of 23, on the Governing Council.
However, when it comes to capital related issues, the German voting share is about 27 percent. Though Germany doesn’t run the show, they will oppose writing the bailout check to the peripheral states in the future, says Willem Buiter, chief economist at Citigroup.
Until now, most of the peripheral debts were owned by the German citizens. However, that is changing and the debt is slowly moving from the private sector to the German government, i.e. – we are witnessing socialization of debt where exposure to troubled economies is being taken over by the government, Buiter added.
The Germans won’t write a check for the creditors of the insolvent euro-area sovereigns nor will they write a check for the creditors of the insolvent euro-area banks. There will be debt restructuring and little bit of bailout, but there will be serious losses for creditors in Europe, Buiter noted.
Asked to comment on German Chancellor Angela Merkel’s recent visit to Greece, Willem said it was undertaken in part to compensate for the horrendous things the lower tier of German leadership had said in the past months about Greece and Greek people.
Some economists believe depreciating the euro below $1.20 will help since debasing the currency will create inflation, thus bringing down real debt. Buiter said it will help in diminishing the problem, but it won’t be enough since external trades (imports and exports) amount to 15-20 percent of the euro-area GDP.
There are major intra euro-area imbalances that can’t be corrected through a weak currency. A weaker euro will help mitigate the pain, but it will never re-launch a full recovery, he observed. You can watch the video here.
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