Germany shouldn't bailout Europe

SUBHEAD: There is no solution other than to let the bankrupt countries and financial institutions go, well, bankrupt. By Ilargi on 20 November 2011 for the Automatic Earth - ( Image above: Oil painting "The Beggars" by Pieter Bruegel 1658. From ( Here's why Germany is wise to refuse using the ECB to buy up anything not nailed down in Europe. All economic forecasts for countries in the periphery -which itself grows as we go along- are based on unrealistically positive numbers. And that means that soon they’ll come calling again for bail-outs. Austerity measures quite simply mean less consumption, and that in turn means a lower GDP. In the US, private consumption is some 70% of GDP; it may be somewhat less in other countries, but not that much. Basically, you have a handful of countries that have borrowed their way into prosperity over the past few decades, and that now find borrowing has become much harder. Italy and Spain need to pay around 7% on sovereign debt, and Greece has already been effectively shut out of the markets. On the sovereign front, borrowing becomes prohibitively expensive, which leads to budget cuts, which lead to austerity, which leads to wage cuts and increased unemployment, but the 2012 predictions all mention the need for economic growth. But what growth? On the business and private front, it also becomes much harder to finance anything with credit. All Eurozone periphery countries have banks that are already teetering on the brink of collapse. What will they do to drag themselves away from the edge? Increase lending? Obviously not. The only option -seemingly- available is to increase gambling. Double or nothing; everything on red. Buy credit default swaps, of course. Which may offer no protection whatsoever; if Greece's 50% "voluntary writedown" doesn't trigger a credit event (a CDS payout), then what does? The outcome is clear: periphery banks (and not just them) will have to come back to the ECB, or the Fed, or the EFSF, but the latter has already pretty much been written off as a failure even now. There’s nowhere left to turn. But nobody seems ready to accept that. Even if it's been obvious for a long time that it inevitably had to come to this. And that has nothing to do with indecisiveness, by the way, that's just a media ruse. The ECB, read: Germany, doesn't have the means and wherewithal to save the entire Eurozone. It could opt to put itself on the hook for $2-3 trillion, just to keep up appearances for another year or so -if that long-, but after that, countries and banks would be trick-and/or-treating at the doorsteps in Berlin and Frankfurt anyway. That wouldn't be a solution. There is no solution other than to let the bankrupt countries and financial institutions go, well, bankrupt. Mark to market. Restore confidence, albeit in a much smaller market. But the world's political and financial "leaders" won't allow it to happen, at least not in real time. Letting it happen in apparent slow-motion has an added benefit: it allows for technocratic, non-elected governments to take over for a while, and make sure countries are bled dry before handing them over to a proper electoral process again. Ironically, there is no more pivotal moment than this one for the people of the embattled nations, but they still allow for these broad daylight stealth takeovers to take place. Papademos and Monti even enjoy "broad support", while they should be tarred and feathered and told never to return or else. Let's turn to the specifics. Greek Finance minister Venizelos says Greece will "only" have a 5.4% deficit in 2012, and no new cuts or measures are necessary. A large part of that "assessment", mind you is based on the 50% "voluntary" write-off by private investors, something that won't be available to other nations. But it doesn't stop there: Greece is in a deep recession, something the negotiators of all the bailout deals and austerity plans have not -or at least not fully- implemented in their calculations. And it'll come back to haunt them (sometimes you'd suspect they aim for just that). Not that it seems to matter much today. All anyone is looking for are numbers that are palatable in the short term. Let 2012 take care of 2012. .

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