10
Popular
·
Thinking Errors
·
Mistakes
·
Fatal Errors
concerning
the
Euro Government Bond Crisis
and
the
Euro Currency
Error
No. 1:
It
is he task of financial markets to tame governments (psi: private sector
involvement): private banks and investors should regulate with their
bond-buying and selling decisions the level of interest rates and with this the
level of public debt.
Financial markets can select private
companies, of which only the fittest should survive. They can not select a
state of which only one exists.
Public debt has to be 100% safe –
otherwise nobody will buy the government bonds – or only with much higher
interest rates. Without the guaranty of the Central Bank these higher interest
rates will work as a self fulfilling prophecy: the interest burden becomes
higher and the deficit and the risk of state-default increases. So the interest
rates rise further.. This vicious cycle ends in a state-default. The process
will be accelerated because banks have to bear huge losses of falling prices of
the government bonds in their portfolio. The banking system is then in danger
and a highly probable credit squeeze will threaten the economy additionally.
Error
No. 2:
Public
debt is not needed, is bad and should be diminished
Public debt has usually the form of
bonds. These bonds are owned by banks, insurance companies and other private
investors. They are the backbone of the assets of the social insurance system.
They are the promise of future income which is needed to pay the pensions of
the people. This paper is valuable like gold or forest or real estate. To
increase public debt also means to increase the wealth of the people. If you
reduce the public debt (by cutting it or by raising taxes) usually people
become poorer.
Error
No. 3:
A
debt-haircut or an insolvency of the state helps the country.
In the first moment, the government
has less debt. But the value of the bonds held by the private sector (banks,
insurance, private investors, companies) will be eliminated. In
Error
No. 4:
A
debt ceiling will help.
A debt ceiling restricts the
political possibilities to stimulate the economy in a recession. So a country
can fall in a deep depression without hope for help from politics. Higher tax
deficits and soaring social expenditures for unemployment will increase the
public debt and blast the debt ceiling away – even - ore because the country is
on a painful austerity trip.
Error
No. 5:
Countries
are to blame themselves for their high public debts and deficits.
This is not completely true. In a
currency union the competition between the companies of different countries is
harder than before because there is no more currency buffer. In the economic
competition like in soccer competition there is always a loser. If a country
has national disadvantages - for instance the social, climatic or bureaucratic
environment - the companies will lose, unemployment will rise , tax payments to
the government will decrease and the public debt will soar.
Error
No. 6:
There
is no simple solution to the European public debt problem.
A 100% guaranty of the European
Central Bank (ECB) for all Euro-public debt would solve the problem
immediately. Euro-Government Bonds would be 100% save and an appealing store of
purchasing power for all investors worldwide. Interest rates for all Euro-countries
would be low and bonds of all Euro-governments would have top quality and top
ratings. If the markets believe in the ECB-Guaranty, the ECB needs not to buy
these bonds.
The problem with this solution is
the mistrust, fear and the will to power of politicians who believe they could
do better – and the here described thinking errors.
Error
No. 7:
The
government bond -buying of the ECB will lead to inflation.
This is only true if the demand for
goods is so high that the goods run short.
Error
No. 8:
A
common
In a politically “united” currency
union with one fiscal policy very different political opinions of the countries
will collide about how much debt for which project should be taken.
Below surface feelings like fear,
mistrust, resentments and envy will lead the discussion. A “common” financial
policy will threaten to divide
Error
No. 9:
It
is impossible to leave the currency union because of escalating government debt
due to the devaluation of the new currency.
Leaving the Euro zone is possible
with a temporary parallel currency (e.g. New Drachma). This New Drachma is
fixed to the Euro for some time and all transactions can be paid in Euro and
New Drachma. New Drachma bonds will be 100% guaranteed by the Greek Central
Bank and will have a higher interest rate. With the new (emergency-) money the
government has immediately avoided bankruptcy and can pay wages and stimulus
programs.
The ECB is also buying New Drachma
bonds to help to fund
Error
No. 10:
An
Emergency Fund (EFSF, ESM) is able to get enough money from investors to
stabilize the government debt market.
The credit rating of an emergency
fund depends on the credit rating of its members. If