European Bailout’s Scapegoats and the Future

May 12, 2010

by Chidem Kurdas

Before the near-trillion-dollar bailout package for financially shaky euro-zone governments was announced, French president Nicolas Sarkozy hauled out the financial whipping boys yet again. He promised to “confront speculators mercilessly.” They would soon “know once and for all what lies in store for them,” he said.

Presumably he meant that those betting on the decline of the euro will be squeezed and made to understand that he and his fellow office holders will protect the currency. Thus Mr. Sarkozy framed the issue—we’re not bailing out profligate governments, we’re defending our common currency against demonic speculators.

This message appears to play well politically  But beneficial as it may be in the short term for those in office, it compounds the real problem.

Pillorying traders who try to make money as the euro loses value helps obscure the fundamental reason for the currency’s weakness, namely deficit-ridden and over-extended state budgets. If the fault lies with a bunch of Gordon Gekko characters, the solution is simple. Haul them off to jail, or if that can’t be arranged, make them lose money on their trades and sweat in front of parliamentary committees.

The alternative is much less palatable. Bloated public payrolls have to be cut. People have to retrench. This is the reality, previously kept at bay by plentiful credit. Much easier to hang Gordon Gekko in effigy. But that way of thinking makes the public less willing to accept the necessary steps.

Thus rioting Greeks blamed Goldman Sachs, among other culprits.  They say Goldman should pay for the mess—with the obvious implication that austerity measures should not be imposed on Greece.

A debt contraction is upon us whether we like it or not. Spendthrift governments and their constituents have to change their ways. By endlessly telling people it’s the fault of financial players, politicians are making change more difficult.  Sarkozy’s rant against speculators causes one to be less optimistic about the prospects for public finances. Governments are to be bailed out, whatever the moral hazard and future liabilities this creates.

What does that say about the future of sovereign debt? Sounds like short selling the euro is a good idea!

As for French president’s claim that anyone who looks to trade on Europe’s travails  is toast, that’s not clear so far. The gigantic bailout buoyed stock markets but not really the euro, which gained a bit but remains down significantly against the US dollar.  Anyone who watched the antics of European politicians must have decided to sell the currency.

3 Responses to “European Bailout’s Scapegoats and the Future”

  1. david Says:

    I particularly liked how a number of the euro grandees characterized the bailout as “defending the euro”.

    I think they meant “insulating monetary union from reality a little longer” or, in Germany’s case, “contrary to what any sane person might think was in our interests, we will in fact not desert the sinking ship – we will go down with it”.

    In any case, it seems to me that it was about defending the currency union itself in the short to medium term, not the value of the euro. I suppose that some investors were shorting the euro based on the possibility that a near-term unravelling of all or part of the union, and the uncertainty as to how that would play out, would bring about a dramatic (but possibly termporary) fall in the euro.

    Reminds me of the “get back or I’ll shoot” scene in Blazing Saddles.

  2. chidemkurdas Says:

    It is an interesting distinction, the union vs. the value of the euro. Countries go through devaluations without necessarily falling apart as political entities. But judging from the EU response, it was seen necessary to discourage a further decline in the currency’s value.

    It is not plausible that a mere fall in the euro will bring about the unraveling of the union. There must be other issues.

  3. chidemkurdas Says:

    In February it was reported that:
    “A poll for popular newspaper Bild am Sonntag found that 53pc of Germans wanted Greece to be expelled from the euro if necessary in the coming months.”
    http://www.telegraph.co.uk/finance/currency/7238035/Most-Germans-want-Greece-thrown-out-of-euro.html
    But governments have now made a large commitment not to go that way. Perhaps that commitment is expected to have a psychological effect.


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