The Fatal Mistakes of Berlin's Bailout Strategy

Spiegel
September 23, 2011

The German parliament is set to approve the expansion of the enormous euro rescue package next week. But this will be a fatal mistake. There is only one reasonable solution to Europe's debt crisis -- and it also happens to be much cheaper.

It was no surprise that Standard & Poor's downgraded Italy's credit rating this week. The decision made Europe's debt strategy only slightly less credible. But does the government in Berlin still believe the European debt crisis can be solved with ever bigger rescue packages?

Seldom have German politicians seemed as directionless as they do in the euro crisis. Never before has Berlin made such serious and costly mistakes, racking up as many errors as they did with their grand plans for Europe.

They want to establish the unity of the continent -- but are nurturing fear and anger in donor and recipient countries alike. They want to sustain the homogenous single currency area -- but are doing everything possible to deepen the divide in the euro zone. They want to safeguard Germany's competitive edge -- but are undermining its future financial viability with unimaginable burdens.

The first mistake begins with the terminology. The talk is and always has been of a "euro crisis." The chancellor has even made the nonsensical claim that "if the euro fails, Europe fails." It is actually possible to talk a currency into crisis and ruin.

Where, pray tell, is this supposed euro crisis? It seems that many politicians, journalists and researchers no longer distinguish between federal budgets and the money supply through issuing banks. What we are seeing is a crushing sovereign debt crisis, not a currency crisis. The intrinsic value of the euro -- despite the talk about the dangers of massive inflation -- is as stable as that of many other currencies.

The external value naturally suffers from the never-ending chatter about a crisis, though. Some EU investors have fled in panic to the supposed safety of Switzerland, thus providing for a depreciation of the euro against the Swiss franc. But compared to the dollar, still the dominant world currency, the exchange rate has remained stable. Measured in terms of purchasing power, the euro is even overvalued against the US currency.

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