Euro Gestalt

Derivatives might not matter if the European Central Bank started acting as a lender of last resort and bought up all Eurozone national bonds under speculative attack. And if that were the end of the story. But the possibility of flushing trillions of Euros into the system, even under conditions of depressed demand, could lead to unexpected, unpleasant consequences — consequences I can only dimly imagine — and such consequences surely would be conducive to further speculative attack through unregulated derivatives instruments. One should not underestimate the intelligence or determination of traders intent on wrecking national economies for profit.

In reality, however, the European Central Bank will not start acting as a lender of last resort because too many European governments are wedded to austerity theory. Whatever "fixes" are in the works may not turn out to be incremental but they almost certainly won't be on a grand scale. The issuance, for example, of some sort of back-door "Eurobond" guaranteed by all with the option of converting dicey national bonds, like Italy's, at a discount, or a multilateral but lower than Euro treaty level agreement to coordinate fiscal policy among the larger Eurozone members — proposals like these don't do much to prevent the weaker members of the herd from being systematically picked off in the bond market.

Indeed, it's difficult to see how anything less than a great increase in the regulation of capital markets can bring stability.

In the wings, notwithstanding pleading by such luminaries as Poland's Foreign Minister regarding the need for more German leadership, it's astonishing that the question has not arisen about what to do with a Germany that has profited more than any other Eurozone member from a single currency, clearly profited at the expense of other members (shades of zero sum), and, moreover, that wants to dump the cost of "fixes" entirely on other members. This is much more a political than an economic problem. It should be properly recognized as such. If it were, it also would be obvious that it concerns U.S. national security interests. Germany wrecking Europe is not something Washington can afford to ignore.

Yet by having raised "the market" onto a higher pedestal than democracy western governments are singularly ill-equipped to repel an attack by "the market" on democracy. The orthodoxy of our ideas cannot help but lead to a further and deeper crisis.