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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman.
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  • Germany's Eurozone Policy Is Completely Incoherent 0 comments
    Aug 23, 2013 9:23 PM
    The whole world is wondering: "What Does Germany Want?"


    No, I'm not talking about 1938, I'm talking about 2013. Here are your choices:

    1. Germany wants to purify the eurozone by purging the debtor states.

    2. Germany wants to exit the eurozone in a polite way.

    3. Germany wants the eurozone's current policies to succeed, and to forge a new Europe on the Germanic model.

    4. Germany has no idea what it really wants.

    I vote for #4. Everything that comes out of Germany is incoherent. I could compile for you a list of statements from Merkel, Schaeuble, Weidmann and Amussen that would illustrate the incoherence, but I will spare you that.

    Suffice it to say that, to analogize, Germany is running a hospital where the patients are required to run around the track all day: "Exercise will make you healthy!" The patients are not allowed to leave the hospital (because they owe it a lot of money), nor are they allowed to step off the treadmill. Already four of the patients are on life-support--but still on the track.

    We are in the middle of the German parliamentary election, and no country is coherent during an election. But I think that whether the conservative coalition is returned to power or if there is a grand coalition, Germany's eurozone policy will remain incoherent. Germany wants to (a) maintain the hard euro; (b) keep the eurozone going; and (c) not have to donate any more money. Which is impossible. Only one of these desires can be met.

    Here is what the German voter is likely to get over the next 18 months: (1) more bailouts and re-bailouts, starting with Greece Part IV; (2) a major expansion of the ESM's "lending" capacity; (3) huge ongoing debt write-offs and bail-ins; (4) Draghi's resignation; and (5) the formation of an anti-austerity bloc within the zone and on the ECB governing board. That's as far ahead as my crystal ball can see. The tragedy is that all of this could be easily and instantly cured with massive deficit monetization and 5% inflation evenly spread throughout the zone.

    Bernanke in 2002:

    "Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress."


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