A visceral disgust for handing out cash to "save the euro" has seized German leaders like a gag reflex in the declining weeks of summer. The idea of paying for the mounting debts of euro-zone countries like Spain and Greece has suddenly struck a number of people in Chancellor Angela Merkel's circle as insane, if not criminal.
Christian Wulff, the normally quiet and uncontroversial German president, wondered out loud during a keynote speech last week whether the European Central Bank really should be starting a second round of massive debt purchase in the form of Greek and other European bonds. "I regard the huge bond buy-ups of individual states by the ECB as legally and politically questionable," he said.
And about two dozen conservative lawmakers who should be allied with Merkel in parliament announced over the weekend that they couldn't vote for the most recent rescue package assembled by French President Nicolas Sarkozy and the chancellor. The rebels resent the idea of a "transfer union" — a permanent set-up for the euro that would let money from the rich countries flow to more indebted governments, without much discussion, just to buck up their credit ratings and hold the currency together.
"Hysteria is sweeping Germany," said Klaus Regling, who directs the European Financial Stability Facility, the rescue fund set up in 2010 to help the euro stay together. A failure by Germany to pay the promised billions of euros into the fund could start a panic on financial markets that Merkel has been trying to avoid since last year.
But if the rebels sound shrill, like the housewives who refuse to pay for their groceries as in Dario Fo's Italian farce Can't Pay? Won't Pay! there's a method to their madness. The conviction is finally growing among elite leaders in Central Europe that smaller governments, like Greece, should just default and restructure their debts — forcing institutional creditors like Goldman Sachs, instead of European taxpayers, to face a loss.
Chancellor Merkel, to be fair, has floated this idea before, but the real example for Europe is Iceland, which found itself in deep trouble with British banks as well as credit agencies after 2008, and essentially told them to take a hike.
A default would hurt Greece's credit rating and damage the euro. But leaders in Europe have very little choice. Two experts from the Max Planck Institute for the Study of Societies, Jens Beckert and Wolfgang Streeck, argued in a conservative paper, the Frankfurter Allgemeine Zeitung, that more than enough public money has been shoveled onto the debt bonfire.
"The financial crisis is now in its third stage," they write. In the first, banks had to be rescued from debt with government help. In the second, some poorer European countries had to be rescued from debt with help from richer governments — as well as their own "retirees and other state-dependent groups," who took benefit cuts to shave public debt.
This rescue phase has come to an end, they argue. In large nations like Germany or the United States, where a damaged credit rating would be a disaster for banking systems at home and abroad, default is not an option; taxes have to be raised. But in smaller countries like Greece and Spain, institutional investors need to take a haircut: Otherwise, they argue, the third phase of the debt crisis will consist of social upheaval.
"It's now clear that the solution to the debt crisis is largely a question of [wealth] distribution," they write. "... Since the growth in GNP over the last 30 years has largely benefited the upper classes, the debt crisis poses a question: Whether, and with what means, the rich will defend their position, even at the price of a massive social and political crisis."
Critics from the financial industry call this sort of talk populism. Maybe it is. But it's all the rage right now among the stodgy German ruling class.