Welcome to the Inflation Zone: The Dangers of the Euro Bailout

A Commentary by Armin Mahler

The euro has been rescued for the moment, but European politicians have thrown the foundations of Europe's common currency overboard with their unprecedented bailout package. In the longer term, the dangers of the crisis can only increase, and the flood of billions of euros could also lead to inflation.

A man walks alongside a TV screen displaying information on the Euro exchange rate in Paris on Monday. Zoom
AFP

A man walks alongside a TV screen displaying information on the Euro exchange rate in Paris on Monday.

The attack has been fended off. The markets are booming and the euro is rising. The protective shield that Europe's politicians erected practically overnight to defend their besieged common currency appears to be working.

Europe's politicians can breathe a sigh of relief -- at least for the moment. They can only relax until it becomes clear that this alleged victory comes at a bitter price. European governments have thrown overboard all the noble principles and promises that ordinary citizens thought would keep them safe: the formal, tough treaty-based foundations for the introduction of the euro and the independence of the European Central Bank.

Of course they did all of this with the best of intentions. Danger, as they point out, was imminent. They wanted to defend the euro against speculators, those sinister Anglo-American powers who were just waiting for their chance to destroy the euro, turning a handsome profit in the process. European politicians -- at least this is what they want us to believe -- were acting in something approaching a state of emergency. We are supposed to believe that they had to prevent a total collapse of the European common currency. A situation like that is no time for squeamishness. That, in a nutshell, is the propaganda version of events.

The truth, however, looks a bit different. The situation on the financial markets had indeed come to a head during the past week. The euro's value had fallen, risk premiums for government bonds from southern European euro-zone members had climbed and stock markets had tumbled -- and all this despite the fact that politicians had agreed to a bailout package for Greece the weekend before last.

A Uniquely Dangerous Rescue Package

It's true that speculators were also busy playing their game. But it's not the major hedge funds that create the trends -- they merely amplify them. What is decisive is the masses of investors: large and small investors, insurance companies, banks and funds. If they believe that the exchange rate will continue to drop, then they dump their investments. If they believe that the euro zone is incapable of managing its problems, then they sell shares and euros. They don't act speculatively, though. They act rationally.

The sell-off on the markets was no attack by speculators. It was a vote of no confidence by investors in the euro and in the Europeans' crisis management. But when everyone rushes to the exit at the same time, panic spreads. That was the situation on Friday. The politicians feared the markets' reactions -- and they began to panic. In response, they approved a rescue plan that will go down in economic history. It is, after all, unique.

And uniquely dangerous. The Europeans and the International Monetary Fund want to make €750 billion available to shore up foundering euro-zone states if they find themselves in a financial emergency. They don't seem to be bothered by the fact that the EU treaties don't contain provisions for such aid. Indeed, they had already ignored the no-bailout clause in the Maastricht Treaty when they agreed to rescue Greece.

But that wasn't enough for the rescuers of the euro -- they wanted to send a message that they were truly serious. So they sacrificed the independence of the European Central Bank (ECB) -- and paved the way for a European Inflation Union.

In the future, the ECB plans to purchase government bonds in emergencies. Not only has this been prohibited until now, it also contradicts the central bank's overarching goal: keeping the value of money stable. Once this taboo has been broken, the very foundations of the euro will erode.

German politicians once promised to make the European common currency as rock solid as the mark. That's why they pushed for strong rules on member states' national debts and the ECB's independence. It was only because of this promise that the decision to abandon the German mark could be pushed through politically. Now both promises are being broken. And the intervention is so fundamental that it can only be explained with great difficulty. That's why the politicians need a bogeyman, in the form of the evil speculators.

A Flood of Money

Otherwise they would have no choice but to say the following: We ourselves are to blame. We perceived the euro as a political project and we ignored the economic necessities. Just writing down the stability criteria wasn't enough -- we also should have monitored and held countries to it. We also should have moved much earlier to bring under control national deficits that were getting out of hand all across Europe. And once the scope of the disaster was clear to us, we should have quickly reached agreement on action.

But the politicians didn't do any of that. That's why they -- and not the financial markets -- are responsible for the decline of the euro. They will also be responsible if the rescue package doesn't hold and the euro breaks apart.

But the politicians have succeeded in achieving one goal: There won't be any state bankruptcies in the euro zone in the future. How could there be? When in doubt, the ECB will just purchase government bonds. The money can't run out, either -- after all, the ECB prints it itself. The American and British central banks are already doing just that today.

But that doesn't make the situation any better -- it only makes it worse. A flood of money like that can't continue without any consequences. The currency's stability will be undermined and, sooner or later, inflation will ensue.

The only hope remaining for Europe is that the rescue package will have a calming effect on the markets and that politicians will use the time they have bought to seriously deal with the euro zone's debt problem. If they don't succeed in doing that, then the rescue package agreed to last week will do little to help. On the contrary: It will merely exacerbate the problem.

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About Armin Mahler
DER SPIEGEL
Armin Mahler has led SPIEGEL's business and economics desk since 1991. He graduated with a degree in business management and worked for the German business magazines Wirtschaftswoche and manager magazine before joining SPIEGEL.

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