Bailout By Design

I was just listening to this interview of Ambrose Evans-Pritchard (mp3) on the McAlvany Weekly Commentary about the EU/ECB response to the Greece/PIIGS debt situation. Evans-Pritchard said something about how if the leaders of the big northern European countries (Germany, France) didn't figure out a way to handle the debt problem with a bailout, then northern European banks would be on the hook for some $2T in potential losses on southern European debt and "the crisis would escalate to a much more dangerous level."

Dangerous for whom? This is a confusion in terms, Evans-Pritchard has it all wrong.

The reality is that the danger exists, no matter what decision is ultimately made-- the European governments and banking interests have created for themselves yet another inflationary debt bomb, just like every other central bank-ridden monetary system around the world has. The question is not "Will they face the danger or mitigate it?" but rather "Who will face the danger?"

The only danger the politicians in Europe care about is the danger the situation might pose to their associated commercial banks. Passing along the troubles and the costs to European society as a whole (that is, redistributing the losses to the taxpaying European public through money issuance) is no "danger" at all in the politicians' minds, save what deleterious effects it may have on their chances at re-election.

But, barring that political risk, this southern European debt bailout scheme is, quite simply, the only "natural" one for a political construct like the EU/EMU. If anything, people shouldn't be as shocked about the way this thing unfolds as they seem to be right now because it's clear this was the idea behind the scheme from the get-go.

Evans-Pritchard said that the German politicos, specifically, made a promise to their people before the EU got off the ground that "something like this would never happen." Grown-ups and other mature thinkers should, by now, be wise to the fact that political promises are made to be broken.