Newspaper article International Herald Tribune

Why Berlin Is Balking on a Bailout

Newspaper article International Herald Tribune

Why Berlin Is Balking on a Bailout

Article excerpt

It is simply unfair for President Obama and other critics to call on Germany to bear even more risk.

Although Europe may seem far away from the economic life of the average American, the fate of the euro zone weighs heavily on the U.S. economy. Pension funds have invested in bonds issued by southern European states, while banks and insurance companies have underwritten a sizable fraction of the credit-default swaps protecting investors against default.

It's no wonder, then, that President Obama is urging Germany to share in the debt of the euro zone's southern nations. But in doing so, he and others overlook several critical facts.

For one thing, such a bailout is illegal under the Maastricht Treaty, which governs the euro zone. Because the treaty is law in each member state, a bailout would be rejected by Germany's Constitutional Court.

Moreover, a bailout doesn't make economic sense, and would likely make the situation worse. Such schemes violate the liability principle, one of the constituting principles of a market economy, which holds that it is the creditors' responsibility to choose their debtors. If debtors cannot repay, creditors should bear the losses.

If we give up the liability principle, the European market economy will lose its most important allocative virtue: the careful selection of investment opportunities by creditors. We would then waste part of the capital generated by the arduous savings of earlier generations. I am surprised that the president of the world's most successful capitalist nation would overlook this.

This does not mean there can be no systematic risk-sharing between the states of Europe. But for that to happen, the countries should first form a common nation, with a constitution, a common legal superstructure, a monopoly on power to ensure obedience to the law and a common army for defense.

Otherwise, there is nothing to counter the strong centrifugal forces created by redistribution schemes, which would inevitably lead to political eruptions that would threaten the stability of the Continent. The European Union has enjoyed a long period of stability because it abstained from sizable interregional redistribution. This period would end if we redistributed incomes or debt without creating a United States of Europe.

Unfortunately, not one of these conditions is met in Europe today and won't be in the foreseeable future, because the euro zone countries, above all France, are unwilling to give up sufficient sovereignty.

Even a European nation, however, should not socialize debt, a lesson demonstrated by the United States in the early 19th century. When Secretary of the Treasury Alexander Hamilton socialized the states' war debt after the Revolutionary War, he raised the expectation of further debt socialization in the future, which induced the states to over-borrow. …

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