Take this to the bank or don’t take this to the bank. There is no way that the German people will feel good about playing a major roll in supporting the entitlement society of Greece. Check out this article below. This could be the swan song for Merkel… In the short term this plan will probably gain traction. However I predict that in the long run, there will be a serious flash back in local German domestic politics as the folks in Germany are fed up with bailing out countries like Greece that were totally irresponsible with their entitlement centric domestic policies. A note for caution in the U.S.
People all over the world are finally getting fed up with bailing out people and countries that have made an art form of sucking off those who have been paying working hard and paying taxes and contributing for years to saving for their own personal future. Now, more and more central governments want to spread fiscal wealth to those who have sucked off the system rather than risk the loss of votes and civil unrest. There will be a price to pay… I say let them fail and force them start over without perpetuating the flawed concepts of domestic entitlements . Just like an individual who needs to declare bankruptcy because of their inability to balance their finances, Greece should follow suit. This too will pass… German people, like many in the U.S. are fed up with central governments making decisions that bleed their own people dry in support of incompetent and dysfunctional governments.
Germans hate the idea of covering the debts of the big spenders of Southern Europe, but the hottest new idea for sharing Europe’s debt burden comes from … Germany.
Surprising but true: Germany’s opposition parties have gotten Chancellor Angela Merkel to reconsider an idea floated last winter that involves joint European liability for nations’ sovereign debt.
The idea comes from the German Council of Economic Experts, also known as the “wise men.” It’s called the European Redemption Pact (PDF), which sounds a bit religious to the American ear but isn’t intended to be.
Since fresh thinking on the European debt crisis is badly needed, it’s worth taking a look at what the wise men advise. Here’s the plan in a nutshell:
The debt of the 17 countries belonging to the single-currency euro zone is split into two parts. The portion up to 60 percent of each nation’s gross domestic product stays on the books, unchanged.
The portion of nations’ debt exceeding 60 percent of GDP is transferred into something called the European Redemption Fund.
The 17 countries are still liable for the portion of their debt that’s transferred in the fund. They have 20 or 25 years to pay it off.
Legally, however, all 17 nations are jointly liable for the debt placed in the fund. This is a way for low-debt nations such as Germany to backstop high-debt nations like Greece, giving peace of mind to their creditors and lowering interest rates.
To make sure countries pay off their debt in the European Redemption Fund, some of their national tax revenue would be earmarked for repayments. They would also have to commit to fixing national finances to free up money for debt service.
Having gotten the rest of their debt down to 60 percent of GDP, countries wouldn’t be allowed to run it back up. There would be automatic “debt brakes,” as Germany and Switzerland already have.
The responsibility of Germany and other creditor nations is strictly limited to the amount of money that’s put into the redemption fund. That makes this plan different from “euro bonds,” which some countries are pushing. Euro bonds would be new bonds for which all the euro zone countries would be jointly liable. There would be no cap on the size of borrowing via euro bonds.
Volker Kauder, the floor leader of Merkel’s Christian Democratic Union, told reporters that the opposition agreed with the government that euro bonds “are not up for discussion.” He said the two sides will “exchange studies” on the debt-sharing proposal.
Befitting a plan originating in Germany, the proposal is not exactly generous. It’s hard to imagine how a country like Greece could immediately begin repaying the European Redemption Fund while keeping the debt remaining on its books at a mere 60 percent of GDP.
But at least it’s something. Establishing the principle of joint liability for debt could open the door to a more forgiving (read: realistic) plan in the future.
There’s a nice touch of human understanding in the wise men’s explanation of their own plan, stressing the twin requirements of “solidarity” and “accountability”:
“Proponents of solidarity are stunned that their Eurozone peers let them stand in the rain, even at the risk of their own peril, while proponents of accountability maintain that they have been disappointed by empty promises once too often. In order to de-escalate the situation a mechanism is needed that allows for combining these two principles.”
Correct. Now it’s just a matter of getting the solidarity/accountability ratio right.
Read more… Bloomberg News.