Grumpy Old European

According to the partial results of the latest ECB survey, the median wealth of Spanish households stands at €178,300 while that of their German counterparts languishes at €51,400. This is largely due to contrasting approaches to bricks and mortar: nearly 50% of Germans rent their accommodation and only 25% own it outright, whereas less than 20% of Spaniards are tenants and nearly half have no mortgage or loan against their property.

In Escorial hangs a pictorial tribute to the victory of the Spanish over Dutch rebels in the 1579 siege of Mastrique. Surely the 1992 Treaty won't be turned into revenge for its massacred inhabitants?

So, they don’t just have more sunshine, think Northerners. Well, while warning avid viewers of house makeover programmes that this may come as a shock and apologising to Adam Smith who no doubt expressed it more elegantly, property is only worth a multiple of what you can get for it in rent. And given the kerfuffle over people being evicted from their homes in Spain for not being able to meet mortgage payments, chances are there aren’t that many rents rising to meet falling house prices. Unless there’s a major turnaround in the economy, beyond the entrepreneurial manufacture of safe-equipped mattresses, this trend will continue to bear down as mercilessly on their value as the midday sun does on the rows of ageing for sale signs.

Individuals responsible for mortgages on an unsellable property worth half what they owe are obviously in a dreadful bind. But outright owners lucky enough to find a buyer must accept an eye-watering loss if they want to unlock the value in their homes and, say, help fund their children’s future or invest in a business. So, how rich are they then in fact?

Ah, say the Northerners, but those banks that provided the air for the housing bubble are in even worse shape. Debts need to be repaid. That’s why austerity is necessary. And (uninsured) depositors may need to be bailed in.

Well, irrespective of arguments for or against it, austerity is certainly freezing growth. The Troika are often portrayed as unwelcome conquerors, but it’s not an invasion: more of an extraction.

In cases of hypothermia, blood retreats to the core of the body to keep the vital organs warm. In Europe’s frozen economic landscape, while property wealth is locked in place to wither, those deposits not removed from circulation and stored in mattresses can easily and will likely course through the veins of the Eurozone from the periphery to the core, following in the steps of bond investors, even if last year’s stampede was checked and partially reversed by the ECB’s OMT initiative. If the bank jog is still leisurely, it seems unlikely to slow down.

In sum, just as peripheral sovereigns are paying heavy interest on their borrowings, southern banks will be starved of capital to pump into their economies with a view to repaying them, while northern banks become flush alongside sovereigns that are relatively relaxed with effectively negative interest rates.

Even more disturbing than the migration of capital is that of talented youngsters joining the flow to the heart, leaving the extremities bereft of their best hopes as well as at increasing risk of frostbite.

Ah, say the northerners, but the heart is getting tired of pumping help to the extremities and isn’t as strong as you imagine.

Hmm. A large part of the bailouts so far ended up where they started. The rapid beating of the heart was through fear of not getting enough blood back. Is bailout fatigue more a case of trepidation about the process breaking down into a transfer union? That is not how a body works nor how the Eurozone should work, at least according to adherents of banking union. Transfusions are from one body to another. Is the singleness of the currency in doubt? Is surgery contemplated?

The leader of the new German political party Alternative für Deutschland (AfD), Dr. Bernd Lucke, sees a split between:

“a segment of an economically unsuccessful southern part, and a more northern, or more central, European part, which currently seems to benefit from the misery of the southern European countries, because all of the capital flows back from southern Europe to Germany, and the Netherlands, and other stable countries, where it helps us to do cheap investment, but which is at the expense of those southern European countries”

Same diagnosis. However Herr Doktor proposes applying a tourniquet and proceeding to amputate thus:

“We are running on a platform to dissolve the euro in a stepwise fashion, on a platform which proposes to reintroduce national currencies, but not by having Germany leave the euro, but rather by making the southern European countries leave the euro first, and then breaking up the remaining euro zone into other smaller currency areas, or into countries which each have their own national currency.

What we do not propose is that Germany leave the euro either now or in the future in any kind of unilateral sense.”

Hmm, the last time I saw Hans-Olaf Henkel, he was arguing passionately for a much more humane operation:

“a jointly agreed [euro] exit of the most competitive countries. The euro may then remain – for some time – the common currency of less competitive countries. It would ultimately mean a return to national currencies or to different currencies serving groups of homogeneous countries.”

What happened between the end of January and the end of March? Henkel’s position was clear in January: he spoke sincerely and eloquently of a separation aimed at alleviating suffering in the south with the weaker of the conjoined twins retaining a functioning heart, whereas in comparison Lucke brings to mind a vivisectionist. His concern for the south being deprived of capital rings hollow: there’ll be very little left by the time his policy stands a chance of influencing events.

I’d hazard that it has become painfully obvious that extend and pretend is running out of road and burden sharing is little more than a pipe dream, with ESM for banks placed carefully alongside OMT on the shelf in the glass case that children are only allowed to look at on Sundays. In which case the game necessarily becomes to see who can best avoid the worst financial repression.

Lucke is convinced that Merkel is hardening her position in response to growing support for AfD. And Jeroen Dijsselbloem would appear to be in tune with this shift.

What is horrifying is that this shift may include contemplating extraction of the life-blood of capital and talent until… Well until there would be little alternative to Lucke’s policy: the frostbitten zones would have been overtaken with gangrene.

AfD claim they are insisting on a return to the principles of Maastricht and try to pass it off as a responsible ma being strict. Nearly a hundred years ago, my grandfather left three frostbitten, gangrenous toes in a trench in Flanders. This return to twenty years ago could overshoot by a factor of five.

This is likely not a conspiracy, but more the result of hardening attitudes. However, instead of talking glibly about moral hazard, we should perhaps consider a deeper morality and see through the massive trick we could be playing on ourselves.


Update: Further reading from Bruegel’s Nicolas Véron.

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