Euroland dominates the financial headlines again, with Greece facing financial collapse, and Ireland seeking to renegotiate her bailout terms. In both cases, the people are beginning to rebel against the spending restrictions imposed by their politicians at the behest of the European Union and the International Monetary Fund.
This is the politician’s worst nightmare: he agrees to something that he fails to sell to his electorate. The politicians have only themselves to blame, having not sensibly considered other options, such as simply defaulting on impossible obligations. Instead, they are blinded by an overwhelming desire to sacrifice themselves on the altar of European co-operation. This vision is not shared by the common people, except in passing, and certainly not to the extent of actually paying for it.
People all over Euroland are edging towards dissent over these transfer payments, both as transferors and transferees. The German people, used to a sound currency, fully understand that their taxes and savings are being wasted on the profligate nations. The Finns are revolting for the same reason and the mood is spreading. It is no longer practical for Euroland’s political classes to play this out in the public eye, so an alternative strategy is called for.
We have to take a step back and think what it is that they must not try to achieve. It should not be to bail out economies in trouble, which is demonstrably what they are trying to do. The best thing that can happen to Greece & Co. is to face up to reality, cut government spending and allow their private sectors to grow. Lending more money to governments simply allows them to avoid facing this reality and defers the transition to a sound economy.
The true objective must be to rescue the banks, because if the banks fail it is game over. This cannot be achieved by leaving it to the individual countries, and it has to be handled by a central authority, the ECB. Whatever the long-term consequences for monetary inflation, the political benefit is that the voting public is less likely to oppose a bank rescue, because it has little understanding of or interest in purely financial matters.
In a roundabout way, this brings us to Dominique Strauss-Khan’s fall from grace. As head of the IMF he has been instrumental in formulating policy for the rescue of troubled European economies. His approach has been socialistic, believing a government-subsidised economy offers the best prospects and is not an obstacle to recovery. However, this merely allows politicians in the borrowing nations to continue with their profligate ways, and to come back for more money when the first bailout goes wrong. That is where we are today with the Greeks, and where we will shortly be with Ireland. The Germans, Finns and others face the prospect of throwing good money after bad.
Ultimately this makes a rescue of the European banking system considerably more difficult. Now that Strauss-Khan is gone, it is time for a more realistic approach: stop funding wayward governments and take their banks under full ECB control. It might buy a few years financial stability while Greece, Ireland, Portugal, probably Spain and possibly Italy restructure their economies properly and become less of a risk to the banking system.