The Stab In the Back Theory of German Fiscal Responsibility


Watching German Chancellor Angela Merkel spend months fending off demands that she force her relatively prudent citizens to pay for profligate Greece has been like a doomed love affair. It's been wonderful to experience, but you just know it's going to end in betrayal and heartbreak.

The great disappointment may be coming in less than an hour, as Merkel is scheduled to make some major announcement on the Greek crisis.

But sooner or later, Merkel will fold. The pressure of the macroeconomic consensus is just too great: Greece is paying interest rates almost as high as it deserves to pay on its bonds; the overvalued stock market is starting to lose steam; and in that great nonsensical epidemic metaphor journos love to use about fiscal crises, we're told that the trouble is now "spreading" to the other PIIGS countries.

Meanwhile, for a perfect example of the Keynesian logic that will sooner or later force a tragic end to this tale, read this Spiegel article by Gustav A. Horn, director of the Macroeconomic Policy Institute (IMK) at Germany's Hans-Böckler Foundation:

On the one side there are the Greeks, who clearly still do not have their financial statistics under control and who produce one false report after another about the country's budget deficit. On the other side are the Germans, who delight in hindering a rapid and unambiguous European response to the Greek crisis…

These observers base their verbal radicalism on the noble economic argument that Greece needs to be made "fit for the financial markets" once again. Another, less sophisticated, argument goes that the vast majority of Germans are unwilling, after years of limiting their own consumption, to make financial sacrifices to help out Greece.

Both Greece's calculation errors and the diva-like reluctance of the German government to help Athens are nothing more than an invitation to speculators to bet on the demise of the southern European country. This also explains why risk premiums on Greek government bonds have shot up to previously unimagined heights in recent days…

It is a fact that speculators have access to no more information about Greece than the economic experts in Europe's governments. There are, however, many market players such as hedge funds which derive profits from uncertain events. The more chaotic things are, the more they like it. Their biggest enemy is political clarity, which is why they are delighted when politicians indulge in scaremongering. In the case of Greece, this scaremongering has succeeded extremely well, as the skyrocketing risk premiums show.

The role of rating agencies can also not be forgotten. It was their downgrading of Greece's creditworthiness that triggered waves of speculation….

The populist argument that the majority of the populace is opposed to financial backing for Greece, is also attributable to the German government…

The German government's submissiveness to the financial markets and its cowardice towards the tabloid press (the mass circulation daily Bild, for example, wrote in a headline: "You Greeks Aren't Getting a Thing from Us") could get very expensive for taxpayers. Now the aid will actually have to be paid out. And the fuss the German government continues to make won't change a thing.

So, the "speculators" are not people who want to make money by guessing correctly about economic events (an easy guess in the case of Greece, which will always go deeper into debt and demand more entitlements). Instead, they are agents of chaos seeking to undo the consensus of politicians.

Note also that the consensus of the politicians has nothing to do with the views of the people who elected them. The Greek bailout is overwhelmingly unpopular in France and Germany—a fact that has nothing to do with politicians or "mass circulation" dailies but with people resenting getting ripped off.

And ripped off to pay for a country that Horn himself acknowledges has repeatedly violated the EU's rules, lied about it in reports, and run up levels of debt and deficit spending that—under the EU's own charter—mean it should be expelled from the Euro zone. Nor does any of this behavior have anything to do with the downgrading of Greece's credit status. That's just the fault of the evil rating agencies.

Germany's no-more-Frau-Neissguy talk has been fun to watch, but when the Greek aid package eventually comes through, just remember how little effect the advanced countries have had with their calls for fiscal responsibility. Greek public employees have been on strike since Thursday, to protest the government's proposed austerity measures.