But I still don't see what the rest of the eurozone is getting out of it.
The Greek bailout, that is. I view it as a bit like the U.S. in Afghanistan. Whether it will yield anything useful from here on in can be debated for a long time. But if we pull out precipitously, and the Taliban take over, it will be seen as a big U.S. loss (whether that's worth the cost is not the question of concern here, only that it is a gross cost, whether or not it is a net cost, all things considered). Since Afghanistan once attacked us (sort of), our entire deterrent would be much less credible.
Going back to Europe, without the bailout no German or French commitment to another European nation, or another European collective project, would be worth very much for a very long time. Boo hoo you may say, but in the European world that is perceived as a very high cost indeed. It would mean writing off the major narrative of European collective progress since the end of World War II.
A second factor is that the choice is either bail out Greece or bail out some German banks. The smaller European nations are more likely to pitch in to pay for part of the former than for part of the latter. Given the size of German banks relative to German gdp, it's not even clear how much the latter is an option. The Germans have to try to keep their fingers in the proverbial dike or else all hell breaks loose. They just can't afford a run on their shadow banking system.
I view the entire bailout announcement, and its scope, as a signaling issue. The Germans loathe such semi-inflationary commitments and basically they just signaled that their banks are a good deal more precarious than the rest of us would like to believe.
So there you have it. Europe is stuck and in response to a crisis they basically raised the stakes. Arguably they had no choice, but they haven't actually eliminated the potential negative outcomes from the gamble.
“But I still don’t see what the rest of the eurozone is getting out of it.”
10-20 more years until we can officially claim that the collectivists government of EU countries are abject failures. The goal is to stay afloat until after the U.S. demise (baby boomer entitlements), because if the U.S. fails first they can officially claim that “free markets” (which I have yet to find in the U.S.) are abject failures.
Please stop making awkward and shallow comparisons to military conflicts. It only invites (usually awkward and shallow) partisan bickering on the conflict itself.
The economic goals of reduced trade barriers have been achieved, though. They’re compromising on other economic issues to maintain what political progress has been made.
“Arguably they had no choice, but they haven’t actually eliminated the potential negative outcomes from the gamble.”
I’d go further and say they’ve increased the potential negative outcomes, because this move will ease the pressures on Club Med to act responsibly and make the eventual crash all the worse.
Great post. The signalling about European economic and political identity is loud, clear and unconvincing. Less clear is whether the German electorate will pick up the parallel less audible signal about the possible exposure of their own banks and the sustainability of their public economy. From afar it looks like Germany’s political elite haven’t really told German people where their self-interest lies. The scapegoats have been the ‘wicked markets’ and the wimpish whimsy Greeks.
The markets were up big on the news. The EMH implies everything is going to be OK. Everyone can relax now. Nothing to see here.
Why did the few German banks get into a position that was this stupid? I’ve heard an explanation for why the EU governments let Greece get into such a bad shape undetected: Goldman created instruments that found a loophole in existing EU watchdog procedures. But that still doesn’t explain why other “private” German banks got themselves in such a bad spot?
Also: True, other smaller EU nations would rather help Greece than German banks. BUT conversely, German voters would rather help German banks than Greece.
Finally, what’s the chance that the Greek bailout will translate into the banks getting their due back? Is Greece immediately going to use the bailout to pay out its loans? What’s the chance that the banks will lose out in spite of the bailout? It’s like trying to fill a tank through a hose and choosing a leaky hose at that.
BKarn said – “Please stop making awkward and shallow comparisons to military conflicts. It only invites (usually awkward and shallow) partisan bickering on the conflict itself.”
Indeed there are partisans of military, cultural and economic imperialism and slaughter- all for corporate and national gain; then there are those of us who oppose such despicable partisans. Peace and justice anti-imperialists vs. warmongering scum.
According to this week’s Economist, the total outstanding Greek debt is not huge, and is considerably less than the Euro-banks equity buffers.
In addition, the Economist suggested that European banks (especially, they infer, the French) may be willing to cut loose their Greek subsidiaries if push comes to shove.
So maybe the second factor is overstated and this is why it hasn’t featured in German political discourse.
“Why did the few German banks get into a position that was this stupid?”
Because they were making money, lots of it! And it’s not just the German banks…
The arbitrage was buying the Greek bonds when they yielded x% and then swapping the bonds at the ECB for cash and paying y% to the ECB, when y << x. It was a license to make money, everyone was doing it, what could go wrong?
I don’t mean to be picky but Afghanistan, well, it never attacked the US. If you stop and ponder it a bit, you will probably reach the conclusion that this is yet another myth invented by the US government (no conspiracy theory intended here).
Actually, when it comes to Greece, it is not the German banks that are the deepest into the mud. France and Swiss hold significant Greek debt that surpasses Germany. And yet, France is willing to bailout the Greece, but they also wanted to force a reluctant Germany into the equation. I think the lucky winner will be the bailout swiss banks.
Maybe they should have done the same thing we should have done. Bombed the government buildings and leave it at that.
The bailouts are based on the idea that while people aren’t rational with the cheap money that gets them into unsustainable debt agreements, they will be ultra-rational with the cheap money to get them out of debts.
>”Since Afghanistan once attacked us (sort of)”
Well, there are 3000 people who are sort of dead, and the World Trade Center is sort of gone now, United 93 was sort of obliterated and for awhile there was a hole in the Pentagon that was sort of large.
So I guess we can conclude that you are sort of correct.
By acting they changed the future.
From what outcome?
Who knows what would have happened?
Who knows what will happen?
It is all speculation…this is not the economy…which seems to be picking up.
If the world economy improves this will all go away.
American government’s actual rationale for invading Afghanistan.
Uh, the gas is in central Asia, Afghanistan is between there and the Indian Ocean. Bonus, explains Pakistan too.
Much has been said and written concerning the impacts on those institutions elsewhere in Euro-Zone that hold Greek (and not just sovereign) obligations if there were to be a sudden default as opposed to a general slide out and down in valuations.
What “they” may “get out of it” is some reduction in immediacy of adverse impacts so that the blows may be spread over time and other assets or revenues.
An examination of the “capital” of the ECB, which issues the Euro, and the application of “mark to market” of its balance sheet might also give some insights.
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