Mario Draghi, the head of the European Central Bank, and Mario Monti, Italy's Premier {together called the Super Marios} have asked that the EU's upcoming bailout fund, called the ESM {European Stability Mechanism}, be doubled in size to €1 trillion from it's current €500 billion. They say it's needed to restore confidence in Southern European {ie.. Spanish and Italian} debt. The ESM essentially will go into the secondary market and purchases Spanish and Italian bonds, which has the effect of lowering the interest rates that Italy and Spain pay when they need to borrow money. Spain's foreign minister Jose Manuel Garcia {not surprisingly} added his voice to those supporting this.
There are a few issues with this: first of all, for those investors who don't have confidence in Spain or Italy, they're going to sell their bonds to the ESM. In short, every time the ESM begins purchases, there is a wave of investor selling. All this really is doing is transferring risk from these investors to the European Central Bank. Hot potato, hot potato..
Secondly, this plan has been tried before-- the ECB's SMP Program was a big buyer of Greek debt as well as Portuguese debt. It did'nt save either nation, and now the ECB itself will be taking a big hit when Greek and Portuguese bonds go belly up. In short, this plan has helped only one group-- investors who were stupid enough to buy Greek debt years ago, but smart enough to unload it onto the ECB before it became worthless. It did'nt help Greece or Portugal or their people.
Thirdly, these nations-- including Italy and Spain-- have lived beyond their means for the better part of a decade. The ESM simply enables them to go on doing this; it simply delays the Day of Reckoning. These nations will, in one fashion or another, have to face the fact that their standard of living is going to be lower. It's not the end of the world for these nations-- far from it. These nations are, as nations go, fairly rich countries. Italy and Spain have per person incomes of roughly $35,000/yr. If they were to balance their budgets and live within their means, this would go down to, say, $27,500 or so. Painful yes-- but not the end of the world. For me {and China's leaders as well} it's the height of arrogance to ask China, who's citizens average $5,000/yr, to bailout much richer nations who refuse to live within their means and face reality. Is globalization partially to blame ? Absolutely. Their powerful unions will have to bend to reality, something they absolutely have refused to do up to this point. Making painful cuts to pension plans and cutting the number of public employees is also needed.
It's long past time that the peoples of Southern Europe begin to face reality. They can start by balancing their budgets and enacting some labor laws which make it easier to hire people to produce goods and services. Throwing another half trillion into the abyss isn't the answer. Will they make the needed changes ? I highly doubt it. These nations, like Greece before them, are world class Ratholes on a one way train headed for a cliff, with Portugal next in line to cross the River Styx.
Update 7pm: Germany's Fin Min Wolfgang Schauble has already nixed this plan; it did'nt even make it to Monday morning. Wow. There is no plan. Iceberg dead ahead.
