I like to be in the USA,
pretending that the wars are done
I like to be in Europa,
say goodbye to everyone…
The Clash, Guns on the Roof
It’s funny how we’re hearing echoes of Europe’s 20th Century civil war. This article in the Telegraph is mostly about Franco-German tensions in the last month, and it appears that Germany is firmly in the driver’s seat, but probably of greater significance is today’s summit between Merkel and Cameron, representing the two economic heavyweights on the European peninsula — one a manufacturing power and the other a financial power. While this relationship is more equal, it looks to me that Germany has the upper hand.
A quick calculation of Germany’s growing obligations to the various bailout schemes has reached half a trillion euro by my reckoning (and rising by the day with ECB ongoing purchases of Italian or Spanish bonds, if either of them were to default) If Asian investors are truly starting to get nervous about Germany’s credit-worthiness as Ambrose is reporting, we may eventually see some changes in policy in Berlin.
Since money is just a bond of zero duration, and bonds are just a vessel of the power of taxation of the sovereign (backed, of course, by men with guns), my guess is that the issuer of the euro (the ECB) will only start the printing presses when Germany itself feels the heat of the bond market vigilantes. And maybe not even then if their ideological angst can’t be overcome. Without printing, the only other option will be higher taxation and austerity in the heimat — perhaps enough to take the whole world down into a deflationary depression.