Germans Enter Election Season

Matthew Kaminski: Trying to Save Europe ‘Step by Step’ – WSJ.com.

Schaeuble attempts to spin Germany’s eurocrisis fighting strategy as a step-by-step process. In reality the strategy is much simpler; it is to keep Greece from defaulting while spending as little money as possible. This is merely a cynical ploy for Merkel’s German government to make it through elections. This chart says it all:

Greek GDP is in a free fall until German elections. Then, magically, it hits a bottom and begins rising. The reason for the realistic projection before elections followed by the fantasy afterwards is because Germany needs the numbers to be this way. Showing the current disaster and pretending growth will resume within a year both pushes through a deal and mollifies the IMF.

The author of this piece states that Greece will not be in danger of default for a year or two. There is no factual basis for this assertion. Indeed, the numbers tend to prove the opposite. The first Greek deal lasted 23 months and the second only eight. Greek GDP and tax revenues continue to surprise to the downside. At this rate, another financing hole will open before German elections.

While another Greek crisis will occur in 2013, what won’t is a banking union. Schaeuble makes it very clear that the Germans will not become jointly and severally liable for bank bailouts, resolutions and a depository insurance scheme. You can’t blame him. Germany simply cannot afford all of these different schemes.

There is no more money for the banking union project. If you do not have money to pay for depository insurance, bailouts of banks currently in trouble and resolution authority for banks that go bust in the future, then you really don’t have a banking union.

The bottom line here is that stringing the PIIGS along, aka “step-by-step,” is much cheaper than allowing a crisis to precipitate. The PIIGS will not be able to overcome their debts and will continue to stagnate, but the euro will be saved now.

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