09.29.11

Germany’s Risky Eurozone Bailout

Germany’s approval of $600 billion to help Greece and the euro financial system is being scorned by analysts and many in the U.S., but is a step in the right direction, says Zachary Karabell.

Thursday morning, the German government headed by Angela Merkel voted in favor of a European bailout fund designed to aid Greece and by extension the entire euro financial system tentatively set at €440 billion ($600 billion).

That rivals in size the bailouts the United States passed at the urging of then-Treasury Secretary Henry Paulson in the fall of 2008 and again in February 2009, Obama’s bill. Whatever the deficiencies of those bills spurring job creation, they prevented a complete implosion of the financial system whose consequences would have made the resulting recession and market plunge look inconsequential by comparison. Yet here are the Europeans led by the Germans taking significant action to stem their crisis—admittedly after multiple missteps—and those efforts are greeted with yawns and derision.

It is a significant move in a positive direction, yet it was widely ignored in the U.S. (provincialism not being at all dead in a globalized world), lampooned by the financial press and analysts as shuffling the deck chairs on the Titanic (a cliché used so many times as to make the poor people who actually shuffled the chairs on the Titanic do a cliché roll in their cliché grave), and taken by the increasingly restive German public as an ominous sign that for all the money they’ve spent so far shoring up the euro and Greece, more is yet to come.

In fact, the financial press was nearly universal in its scorn. A Wall Street Journal editorial decried the fund as just more bad money covering up more bad loans, and said that this can only end badly for Europe and the world. Stock markets rallied on the news, then fell, then rallied, exhibiting yet another day of schizophrenia and frenetic, directionless trading. One note sent to me by a deeply learned observer at one of the major investment banks called the vote and the proposed fund “our Munich moment,” and in this case “we”—all of us, including the Germans—are Neville Chamberlain. And you know what came after that.

Sure, this could all end badly. We know that. We know it because that is all almost anyone in any public venue and anyone in politics and finance has been saying ad nauseam for months upon months. There is relentless, unremitting negativism about bad debts in Europe, and in the U.S., and about impending global recession that portends worse days ahead. We are told of the end of the European Union that is being brought on by Greek default and political ineptitude. That then is joined to Washington ineptitude, partisan fighting that will only intensify as Republicans seek to halt any new spending and Democrats seek to halt any new cuts, and both parties square off for the November elections to determine the Congress and the presidency. Throw in the faltering of the emerging world (China et al), and the euro bailout fund of $600 billion, even if it is levered up, look as flimsy as the New Orleans levees in 2005.

Then again, this is real liquidity, and a genuine multigovernment fund that can act as a backstop, purchase debt, and keep the situation from spinning further out of control. Governments anywhere rarely act before a crisis, and the way they respond during one only seems coherent in retrospect. Franklin Roosevelt’s response to the Depression was an exercise in constant, messy improvisation, as Michael Hiltzik brilliantly shows in his new book The New Deal. The carping and criticism are deafening, but shouldn’t there be a time-out to acknowledge that denial is over and crisis-solving is beginning?

Shouldn’t there be a time-out to acknowledge that denial is over and crisis-solving is beginning?

But it won’t work, says the chorus, and we don’t want to spend more, say German citiizens, French citizens, and the wealthier states of Northern Europe. And, say the Americans, who cares? We love Obama, hate him, love the Tea Party, loath them, and the Europeans are hapless and helpless, anyway. The European Union has formed in spite of popular opinion that resists it, and current resistance is not much different from past discomfort.

As for Americans, they need to care. What happens there will profoundly affect here, and already has contributed to trader-driven, short-term market swings that in the past two months have seen more value destroyed than created. And while Greece’s economy is not much bigger than that of Maryland, it doesn’t take a big pebble to start a financial avalanche in an interconnected system that is prone to panic.

All the more reason to laud—or at least not pile on—evidence of action. And to those who say that current plans simply ladle more debt on top of bad debt, that view misses the fact that governments are legitimately in the business of maintaining order, not in following Hayek or Milton Friedman or Adam Smith.

So what is the economically sound way to solve the issue of the Eurozone? No one knows. It is a new entity, a bold, risky experiment of monetary union with as yet insufficient political union to deal with huge differentials in governments and society. It would be as if the 50 American states shared the currency of the dollar with a Federal Reserve but no federal government in Washington capable of coming directly to the aid of any individual state. For all the wise and certain critics, there is no clear solution, because we are all just making this up as we go along.

Action in the face of that unknown is essential and inherently risky. This bailout fund is a step, not the last, and not the end of the story by any means. Merkel held her party and her coalition together to take needed, unpopular action, which is a tad more than we can say in the U.S. just now. The current European measures to stem and end their crisis aren’t enough. But they are making vital steps forward.