Prior to the start of the systemic crisis of the euro in 2010, private European banks were the recipients of masses of taxpayer money, to prevent them from collapsing due to their over-leverage (too much debt relative to equity) that made them unsustainable. That was the first round of direct bailouts, or of state-injected “liquidity” that was supposedly aiming to take state money, offer it to banks, who their selves would lend it out to the real economy – a plausible theory, only it never works that way, since no bank would lend out all that money when it could cover its capital gaps with no real cost and when the recession was creating uncertainty (instead they used that money to buy sovereign bonds that would pay back with interest!).
The second round of bailouts was of an indirect character. Insolvent states were bailed out not thanks to “solidarity” and “partnership” of the rest Europeans, but because of the exposure of certain major banks in these countries that would again lead to the dilemma of either direct bailouts or bank failures. Since direct bailouts for a second time within a few years would have been politically impossible, it was better to hide behind the “profligate” states, bail them out, so they could their selves pay back their creditors, who were those private banks. Ever since 2008 the basic principles of capitalism, i.e. the profitable stay in business, the others go bankrupt and leave, have been violated time and again, leading to the creation of zombie institutions, distortions in the capital structure and huge black holes that absorb liquidity, retarding growth.
Currently we are entering the third phase of the narrative, it yet remains unclear how will private banks receive their “presents” from taxpayers. The current discussion, which ostensibly aims at how to save the euro, evolves around two pillars. Eurobonds on one hand that will come at the high cost of eroding national sovereignty, effectively transferring it to some unelected EU institution (probably the Commission); ECB debt monetization on the other, which will again have all sorts of strings attached. Economically speaking both policies will do nothing to save the euro, for they do not address the single most important fundamental flaw of the single currency, that of structural trade imbalances that condemn the periphery into a permanent trade deficit vis a vis the center, resulting in erratic capital flows that lead to abnormal behaviours of national finances. Yet both these policies are extremely good news for bankers, since they will not have to suffer from any debt restructuring and if they do, that will mostly be in their favor as the Private Sector Involvement in Greece has shown.
Jointly issued eurobonds, as the Commission proposed them, will practically use the excellent credit rating of certain surplus countries, led by Germany, to attract relatively cheap money so that responsibilities towards creditors of certain peripheral states can be met. That is good news for creditors (mainly banks), no wonder they are pushing for it, since they will not have to experience any “haircut”. If states cannot find enough money to pay back their creditors, they default or they engage in direct negotiations with them to restructure their debts. They must – and they should be allowed to – do so, otherwise good money is thrown after bad money effectively perpetuating debt, enlarging the underlying problem.
Similar with debt monetization by the ECB. Apart from the political discussion on whether a supranational entity such as the ECB should engage in national affairs and whether that would undermine its independence; the practice of buying sovereign bonds has never been a way of solving the underlying issues. At best it postpones a solution to the future, while the debt will probably increase, the economy will continue to under-perform and inflation will start increasing eating in the purchasing power of individuals effectively reducing even further the growth prospects. All this just to make sure that creditors in present time do not have to suffer from any debt restructuring. Again why prevent defaults or partial defaults, with policies that cause moral hazard, create false incentives, distort the capital structure and sustain the malady?
As already mentioned it yet remains unclear how will bankers will be served this time. On December 9 a European summit is taking place aiming, as did the previous ones, at a “comprehensive solution” to the systemic crisis of the euro. The discussion so far, which seems to prepare the ground for what will be decided is completely detached from such a solution. Instead it follows, just like the previous summits the same failing approach to the whole issue, one that has done much more harm than good and for which European citizens will be paying for long after this crisis ends. The malinvestment of these years of the crisis will bear unpleasant results in the future as Europe will not easily be able to achieve real growth, robust to a range of shocks.