Not a day goes by when the German government isn’t under heavy fire from outside interests, including Barak Obama who is facing a tough reelection campaign; and the last thing he wants is any crap flying across the Atlantic and messing up his campaign speeches. They all want Germany to agree to pick up whatever the tab might be for bailing out the Eurozone, beyond the hundreds of billions of euros it has already agreed to pick up. And Thursday it was a loud crescendo that turned into a cacophony.
Yet May has taken the sheen of what Germans have come to call their “success recipe” that has led to phenomenal growth, by German standards, from the trough of the financial crisis through the Eurozone’s current and apparently eternal debt crisis. The DAX suffered its worst May since the index was founded in 1987—it was down about 7%—after a series of economic data that have made a sharp turn for the worse.
The latest came Thursday when the Statistical Agency reported that rail cargo in the first quarter had dropped 2.7% from prior year. While cargo transported to neighboring countries rose by 1.8%, cargo shipped between locations in Germany dropped 2.3%, cargo received from other countries dropped 5%, and transit cargo, a measure of the broader economy in the region, dropped a stunning 12.2%. The trend is even worse: March was particularly nasty with an overall decline of 6.4%. In the same breath, the agency announced that retail sales had dropped 3.8% in April from prior year. Analysts were hoping for an increase of 0.2%.
And turmoil continued to spread: Euler Hermes, a subsidiary of German mega insurer Allianz, and Coface, a French credit insurer, announced that they would no longer insure exports to Greece, fearing the unpredictable consequences if Greece reverts to the drachma. A first in the history of the EU that insurers backed away from a member country. One more item in the litany of signs that the Eurozone is bogging down in its own mire.
Meanwhile, the astounding wave of central bankers’ unleashing hard truths continued: Thursday it was ECB President Mario Draghi who, in discussing the travails of the Eurozone, let slip that “The configuration we had for 10 years, which was considered sustainable, has been shown now to be unsustainable….”
Gasp! He was following in the footsteps of Thomas Jordan, President of the Swiss National Bank and long-time euro-skeptic, who’d discussed the consequence of a collapse of the euro.
And before him, it was Jens Weidmann, President of the German Bundesbank and member of the ECB Council, who’d slammed French President François Hollande, the ECB, anything reeking of a transfer union, and even Paul Krugman.
Draghi was pushing for dramatic action, where German taxpayers (and those of a few other countries) would be stuck with the bill. He called for the establishment of a Eurozone-wide centrally supervised (by him, presumably) banking union with a resolution fund and a deposit insurance fund to put an end to the quiet bank runs before they turn into panic. But he forgot an inconvenient fact: banks would normally be required to pay into such a fund for years to benefit from it during some distant crisis; but the fund doesn’t exist yet, and banks haven’t paid into it, and so the entire amount of the deposit insurance needed for the current crisis would have to be born not by banks and their investors, but by taxpayers, and particularly taxpayers still able to do so, mostly those in Germany.
“It is better to err by too much in the very beginning rather than by too little,” he said. The former Goldman Sachs banker was talking his book. It’s bailout mania all over again. Crony capitalism at the expense of taxpayers in other countries.
“The next step is for our leaders to clarify what the vision is for a certain number of years from now,” he said. “Dispel this fog.” Again, stunning clarity. “Greater centralization of supervision is essential,” he added, on the principle that national democratic processes and institutions should be usurped for the sake of the euro, and that holders of government and bank debt shouldn’t ever lose their shirts—forgetting that defaults and bankruptcies are the cleansing processes of debt-fueled capitalism.
Of course, Germany and a handful of other countries could agree to bail out first Spanish banks, then Spain, and then Italy, if they even could, along with some other countries and a slew of banks, including their own banks, to save the euro. The sums are so vast that taxpayers couldn’t actually do this. It would require the ECB to print these bailout trillions. A treaty change would allow that in no time. Hollande, Obama, et al. would be ecstatic. It would solve the Eurozone debt crisis in one fell swoop.
The ECB would turn into the Fed or the Bank of Japan. It would eventually debase the currency and permanently free governments from the arduous and painful task of getting their budgets in order. Instead, politicians would follow the Japanese model, where debt amounts to 230% of GDP, and where utter fiscal gloom is pervading the lives of the young. The US, with its ballooning debt and out-of-control deficits, is already on that track.