Eurozone Policy that Rewards the Reckless at the Expense of Taxpayers


Economist David McWilliams describes what led to the crisis, who is being bailed out, the terrible policy decisions being made, and the negotiating position of peripheral countries in the Eurozone. McWilliams’ whiteboard animations are embedded following these select notes:

  • The bill for individual and institutional debt that led to the crisis has been passed on to people who had nothing to do with creating that debt.
  • Europe has been turned from a democracy to a bankocracy.
  • There are 2 ways out of a debt crisis: squeeze the debtor, or forgive the debt. If you squeeze the debtor – a.k.a. austerity – you make it less likely that the debtor will be able to pay back the debt.
  • The more austerity, the less growth. The less growth, the less tax revenue. It is like putting someone in debtor’s prison for being in debt; no one in prison has any way to make money to pay off debt.
  • A fiscal union is supposed to help regions when they get into trouble – that’s what happens in the American fiscal union. In Europe, it is working the opposite way.
  • The German solution will cause more recessions in the periphery.
  • The ECB solution is “cash for trash”, where bust European banks give the ECB trash as collateral. In return, the ECB gives the banks cash. The insolvent banks lend that money to insolvent governments at 6%. The ECB is lending one trillion Euros to the banks in this fashion. The banks borrow at 1% and lend it to governments at 6%. The taxpayer pays the bill for the banks to be bailed out.
  • The banks get all the money they need. But when the people ask to keep hospitals and schools open, they are told there is no money available.
  • Central banks around the world are trying to reflate the bubble by injecting liquidity in order to avoid the consequences of the bursting of the bubble in the first place; when the next crash comes it will be bigger and more devastating.
  • Over the last 3.5 years, Europe and the US have pumped $8.7 trillion into the banks. Cash looking for a home means higher prices – for oil, for example. The cash will find its way into assets and then will produce inflation. We may see Volckeresque interest rates when that happens.
  • Government debts and fiscal deficits did not cause the Eurozone’s problems. For example, in 2008, Spain’s debt to GDP ratio was lower than Germany’s. Government debt and spending exploded in response to, not ahead of, the crisis.
  • Financial panics do not cause the destruction of wealth; financial panics only tell you the extent to which wealth has already been destroyed by reckless speculation.
  • The German elite do not want a United States of Europe; they want a Federal Republic of Europe, based on the Federal Republic of Germany. They want a Europe that looks and feels democratic, where Germany makes the important decisions.
  • The Germans want the Euro to remain intact in order to sustain their strong trade position. They also benefit greatly from the weak Euro – a Deutschmark would be far stronger and would weaken their trade advantage.

David McWilliams is an Irish economist and journalist who is calling for a much tougher stance in negotiating with the European Union. You can visit his website at http://www.davidmcwilliams.ie.

Capitalism Without Failure