The Germans kind of like the euro crisis

Thanks to the IMF/WB fall meetings this week in D.C., a lot of finance ministers, central bankers, and other folks have been in town giving presentations. I had a chance to go to a lunch lecture today to hear from someone who is a senior member of the German government. He said something pretty surprising.

He was glad that Italy was getting victimized by the bond markets. Why? Because, according to him, the Italian government would never implement needed structural reforms unless it were pressured from the outside. Not only that, but he went on to criticize the European Central Bank for temporarily intervening in the markets earlier this summer to keep a lid on the interest rates that the Italian state was paying on its debt.

Is this what good neighborliness has come to these days?

Recall this article that I linked to last week. Mallaby, who is very well-informed on European issues, was mystified at the ECB’s reluctance to guarantee the interest costs on Spanish and Italian debt. He suspected that Germany might be hoping to use the crisis to impose reforms on its fellow Europeans, but did not have hard evidence:

Why won’t the ECB do for Europe’s governments what it happily does for  Europe’s banks? The crude answer is Germany—and particularly the top German central bankers who have consistently opposed buying government bonds. But the logic of these hawks is elusive…The best explanation of the German position is that, by seeming crazy enough to allow Italy and Spain to go under, the central bank can terrify politicians into slashing their deficits. But this bluff is hugely risky. In Italy, unemployment for under 25s stands at 29 per cent. In Spain, the share is 44 percent. Further austerity in these countries is neither economically sensible nor politically defensible. In these circumstances, outside efforts to impose austerity via tough conditionality are unlikely to work—a point that NYU’s William Easterly demonstrated more than a decade ago in his critique of  conditionality in World Bank programmes. Anyone who thinks Europe can be the magical exception to Easterly’s evidence should ask themselves how well conditions are succeeding in the case of Greece.

Now we know for sure. It certainly explains Berlusconi’s colorful description of Frau Merkel.


About Matthew C. Klein
I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.

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