Euro, Debt and Banks - no reason for more 'coordination'

The well-meaning proposals to avoid a break-up of the Eurozone quite often lead to the recommendation to give more power to a Federal Government that will have more power than the Governments of the individual member states. This is nothing but propaganda by the centralists of all persuasions - be they in the bureaucracies in Brussels, in the Media, Finance or Academia. The main problem at present is the linkage of the bad debt problem in the banking system with the overindebtedness of certain member states. This leads to the (false) conclusion that only by bailing out these states and setting up measures that avoid any state getting into trouble again in the future it will be possible to keep the Eurozone intact. But this means barking up the wrong tree. Policies should primarily focus on safeguarding the banking system. When that has been achieved it is perfectly practical to let individual member states declare bankruptcy and leave it to their politicians to sort out their problems.

German Banks fear for Euro 400 Billion

Update: the more representatives of financial firms argue that a 'fiscal union' in the EU is unavoidable in order to 'save the Euro', the more we are convinced that faulty (or wishful) thinking is behind their arguments. See recent interviews from Pimco and Commerzbank.
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Horror headlines such as these do nothing to further a rational discussion about debt problems in Europe. There really are three simultaneous crises happening in Europe at the moment: Most national states have run up their debts to a level that has become unsustainable. This would have also been the case if the Euro would never have been introduced. Buying votes by inventing more and more handouts can not go on forever as the state can not increase its share of GNP beyond a certain level - and definitely not beyond 100 per cent! The crisis of the Euro is the next crisis - and this one is aggravated by the banking crisis. No one has made any provision in banking practices or regulations for the possibility that a member state may wish - or be forced - to leave the Eurozone. If any of the zillions of 'experts' in the EU and its member states would have been farsighted enough, the banking system would not have been allowed to build an enormous web of assets and liabilities throughout the EU while pretending that the Eurozone would exist forever. A German bank for example should have been obligated to make ample risk provisions for the eventuality of a break-up. Maybe funding for international exposure should have been on a matched-funding basis so that all assets in, say, Spain are funded by a separated Spanish subsidiary that gets its funding in Spain. In that case the problem faced by 'peripheral' EU member states would have been reduced to a pure problem of economic and fiscal policy in the respective country and would not have endangered the Eurozone as a whole. When 'experts' now say that the only solution to the problems of the Eurozone is the introduction of a fiscal union one can explain this wrong prescription in two ways: either these experts are just plain wrong or they are motivated - as were the fathers of the Euro - by the hidden agenda that was intended to create a European (Socialist) Superstate all along, where money gets freely directed to the pet projects of unaccountable lobbies or the politically well-connected. To return to the problem mentioned in the headline above: one should never confuse overall exposure with the level of the final loss that has to be expected. As the Latin American debt crisis of the 1980's demonstrated, recovery levels may be well below 100 per cent but they will be substantial if an intelligent debt workout plan is adhered to.

Are Governments more risky than some banks?

Until the full force of the credit crunch hit the investment landscape during 2007-2009 this question would have been brushed aside with a quick No! At least this was the situation in the 'developed world'. But during the past year the cost of insuring against the default by the state in many a 'developed' country has regularly surpassed the cost of insuring against the default by a large commercial bank.
After the mini-panic of May 2010 when a default by an EU member state suddenly looked more than likely the markets have calmed down. The pricing of government debt allows investors to make a rational analysis of the likelihood of future default and this has calmed the markets - for the time being.
We think that the burden of excessive and unproductive debt carried by many governments will eventually be whittled down by inflation. The resulting loss in purchasing power will be the involuntary contribution made by savers and investors to finance the politician's pet spending projects.