All year I thought the ECB would do the right thing and adopt the monetary religion of quantitative easing. Then, we realized how stubborn the old guard (Germany) can be and how masterful they have been at recreating the eurozone at their leisure. While they let fires burn in Athens, Rome, and Madrid, they ramped up the pace of political and fiscal concessions.
And last week, we also got a great lesson on the mechanics of the eurozone’s failure from Dirk Van Dijk in his article “3 Paths for Europe.” Apparently, it’s all about trade imbalances, not fiscal irresponsibility. After you read it, you’ll wonder how anyone thought the eurozone experiment could work in the first place.
As I did some reading over the weekend of eurozone official comments — on and off-the-record — it dawned on me that the ECB is also avoiding a not-so-obvious moral hazard for as long as they can. It’s not their fear of tempting inflation. Nor jeopardizing their credibility. Nor breaking the law.
It’s that if they don’t hold the line now on fiscal reform and discipline, they will be faced with a flood of beggars. They will come with a bazooka if it becomes absolutely necessary, but not until then. They will play chicken with the bond vigilantes and run all the consequent potential risks of systemic meltdown rather than be the ones who gave in to supporting the undisciplined and profligate.
I don’t see Europe as full of undisciplined beggars. But it doesn’t matter what I think. It matters what the powers that be think.
The powers that be in Germany and at the ECB might even fear throngs of helpless, unemployed, hungry, nationalistic poor even more than inflation. Centralized austerity is much preferred to induced dependency and political chaos that is highly susceptible to revolution.
This is the only way I can explain their lack of decisive, powerful action when faced with what appears to be certain economic collapse.
What say you?
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