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What is not discussed in this article is the staggering amount of Italian debt the German government is exposed to as a legacy from the 2008 financial crisis. A

by revel 8y ago

What is not discussed in this article is the staggering amount of Italian debt the German government is exposed to as a legacy from the 2008 financial crisis. An Italian default would be like an atom bomb going off in European markets and the ECB no longer has the means to do much to stop it. Post 2008, the ECB forced a lot of unpopular economic restructuring measures, but it never forced bondholders to take the large haircuts necessary to allow the countries to properly delever. Instead the solution was more debt at favorable rates and forced adoption of contractionary fiscal policy. The result is that you have countries like Greece and Italy that were crushed under a wave of austerity and slowly ballooning debt whose economies never really recovered because of the toxic combination. Germany was largely acting out of self-interest when it provided the financing the countries were asking for so now German banks were terribly exposed to all that debt. The German bailout of European nations moved bank exposure to the German taxpayer. There's some lingering resentment amongst the German public about propping up the Greeks, in particular, but they ain't seen nothin' yet! The next financial crisis doesn't even have to start in Italy in order to trigger the Italian debt bomb and wreck the European economy. A no-deal Brexit could do it. A sharp drop in the American economy could do it. All of this is to say that we've been crossing a shaky rope bridge across two mountains for quite some time and I'm not sure that we'll get to the other side. Happy Sunday everyone!

atq2119 8y ago
> and the ECB no longer has the means to do much to stop it This is incorrect. The ECB is the emitter of Euros. They run the whole system, so they always have the option to buy government bonds, for example. Now, whether the politics will allow that to happen is not necessarily obvious. But that's a separate question, let's not get confused about that.
- krona 8y ago
  > The ECB is the emitter of Euros. They run the whole system, so they always have the option to buy government bonds, for example. There is a 33% limit imposed on the total amount of any country’s public sector debt that can be held by the ECB. Now what you're saying is not just that the limit be increased but also that the ECB only buys Italian bonds, creating a moral hazard arguably as bad as any other outcome.
- JumpCrisscross 8y ago
  > they always have the option to buy government bonds The ECB is uniquely restricted, compared with other central banks, by "Maastricht treaty provisions that prohibit the ECB from financing member states" [1]. (These limits are "in terms of proportion of overall public debt (33 per cent) and of each country’s specific debt issue (33 per cent).") [1] https://www.ft.com/content/8c3ea45c-acd5-11e7-beba-5521c713abf4 https://www.ft.com/content/8c3ea45c-acd5-11e7-beba-5521c713a...
  - repolfx 8y ago
    The EU institutions invariably ignore treaties the moment they become problematic to the further progress of the EU project. It doesn't matter what the Maastrict treaty says - if the political will is there to print euros to bail out Italy it will happen, if there isn't, it won't. Consider what happened last time the treaties forbade bailouts: https://www.reuters.com/article/us-france-lagarde-idUSTRE6BH0V020101218 https://www.reuters.com/article/us-france-lagarde-idUSTRE6BH... “We violated all the rules because we wanted to close ranks and really rescue the euro zone,” Lagarde was quoted as saying. “The Treaty of Lisbon was very straight-forward. No bailout.” The summit approved a two-sentence amendment to the treaty at Germany’s behest to permit the creation of a European Stability Mechanism to handle financial crises from 2013.
    - JumpCrisscross 8y ago
      Amending a treaty isn’t the same as ignoring it.
      - repolfx 8y ago
        Clearly the French FinMin (Lagarde) didn't agree with you. But if the 'rules' a group of people agree to are such that they are thrown out the minute they become inconvenient, then the entire concept of a treaty or written law itself becomes irrelevant.
JumpCrisscross 8y ago
It's useful to contrast the effect of an Italian default on the European economy to e.g. Illinois defaulting on the American economy. The former is an existential crisis. The latter a bad day. Europe's sensitivity to member states defaulting comes from its lack of an EU-wide deposit insurance scheme [1]. There was an opportunity to do this after the Greek crisis. But Germany's undercapitalized regional banks opposed the measure. (With centralized insurance comes centralized supervision.) So when Italy's €2.4 trillion debt [2] implodes, it isn't shouldered by the EU's $18.8 trillion production base [3]. It wipes out every Italian bank. Which wipes out the Italian deposit insurance scheme. Which sends the pain straight to Italian pocketbooks, and through it, consumption. Meanwhile, French banks only get to rely on France's €2.3 trillion economy; German banks on Germany's €3.3 trillion economy; Malta's banks on Malta's €11 billion economy. The last crisis could be called a growing pain. This next one will be the result of a broken political institution. [1] https://global.handelsblatt.com/opinion/german-banks-must-oppose-an-eu-wide-deposit-insurance-874533 https://global.handelsblatt.com/opinion/german-banks-must-op... [2] https://www.nationaldebtclocks.org/debtclock/italy https://www.nationaldebtclocks.org/debtclock/italy [3] https://en.wikipedia.org/wiki/Economy_of_the_European_Union https://en.wikipedia.org/wiki/Economy_of_the_European_Union
- repolfx 8y ago
  That's a very federalist viewpoint. Many Germans would undoubtably view it as a working political institution - that is, they don't want to have to bail out the Italians, they never agreed to that, and in fact insisted on budget clauses and agreements in various treaties (which they then themselves violated but in the 'right' direction, but even so). For your view to be correct everyone has to be totally on board with perma-bailouts of profligate states. They are not.

by revel 8y ago

atq2119 8y ago

> and the ECB no longer has the means to do much to stop it This is incorrect. The ECB is the emitter of Euros. They run the whole system, so they always have the option to buy government bonds, for example. Now, whether the politics will allow that to happen is not necessarily obvious. But that's a separate question, let's not get confused about that.

krona 8y ago
> The ECB is the emitter of Euros. They run the whole system, so they always have the option to buy government bonds, for example. There is a 33% limit imposed on the total amount of any country’s public sector debt that can be held by the ECB. Now what you're saying is not just that the limit be increased but also that the ECB only buys Italian bonds, creating a moral hazard arguably as bad as any other outcome.
JumpCrisscross 8y ago
> they always have the option to buy government bonds The ECB is uniquely restricted, compared with other central banks, by "Maastricht treaty provisions that prohibit the ECB from financing member states" [1]. (These limits are "in terms of proportion of overall public debt (33 per cent) and of each country’s specific debt issue (33 per cent).") [1] https://www.ft.com/content/8c3ea45c-acd5-11e7-beba-5521c713abf4 https://www.ft.com/content/8c3ea45c-acd5-11e7-beba-5521c713a...
- repolfx 8y ago
  The EU institutions invariably ignore treaties the moment they become problematic to the further progress of the EU project. It doesn't matter what the Maastrict treaty says - if the political will is there to print euros to bail out Italy it will happen, if there isn't, it won't. Consider what happened last time the treaties forbade bailouts: https://www.reuters.com/article/us-france-lagarde-idUSTRE6BH0V020101218 https://www.reuters.com/article/us-france-lagarde-idUSTRE6BH... “We violated all the rules because we wanted to close ranks and really rescue the euro zone,” Lagarde was quoted as saying. “The Treaty of Lisbon was very straight-forward. No bailout.” The summit approved a two-sentence amendment to the treaty at Germany’s behest to permit the creation of a European Stability Mechanism to handle financial crises from 2013.
  - JumpCrisscross 8y ago
    Amending a treaty isn’t the same as ignoring it.
    - repolfx 8y ago
      Clearly the French FinMin (Lagarde) didn't agree with you. But if the 'rules' a group of people agree to are such that they are thrown out the minute they become inconvenient, then the entire concept of a treaty or written law itself becomes irrelevant.

JumpCrisscross 8y ago

It's useful to contrast the effect of an Italian default on the European economy to e.g. Illinois defaulting on the American economy. The former is an existential crisis. The latter a bad day. Europe's sensitivity to member states defaulting comes from its lack of an EU-wide deposit insurance scheme [1]. There was an opportunity to do this after the Greek crisis. But Germany's undercapitalized regional banks opposed the measure. (With centralized insurance comes centralized supervision.) So when Italy's €2.4 trillion debt [2] implodes, it isn't shouldered by the EU's $18.8 trillion production base [3]. It wipes out every Italian bank. Which wipes out the Italian deposit insurance scheme. Which sends the pain straight to Italian pocketbooks, and through it, consumption. Meanwhile, French banks only get to rely on France's €2.3 trillion economy; German banks on Germany's €3.3 trillion economy; Malta's banks on Malta's €11 billion economy. The last crisis could be called a growing pain. This next one will be the result of a broken political institution. [1] https://global.handelsblatt.com/opinion/german-banks-must-oppose-an-eu-wide-deposit-insurance-874533 https://global.handelsblatt.com/opinion/german-banks-must-op... [2] https://www.nationaldebtclocks.org/debtclock/italy https://www.nationaldebtclocks.org/debtclock/italy [3] https://en.wikipedia.org/wiki/Economy_of_the_European_Union https://en.wikipedia.org/wiki/Economy_of_the_European_Union

repolfx 8y ago
That's a very federalist viewpoint. Many Germans would undoubtably view it as a working political institution - that is, they don't want to have to bail out the Italians, they never agreed to that, and in fact insisted on budget clauses and agreements in various treaties (which they then themselves violated but in the 'right' direction, but even so). For your view to be correct everyone has to be totally on board with perma-bailouts of profligate states. They are not.