When will politicians finally accept that their ideology of cheap money has failed?
A low-interest-rate policy after the dot-com frenzy encouraged the housing bubble. The government-sponsored housing boom led to a banking meltdown. And the fight against the banking crisis resulted in the sovereign-debt mess. Now, because it is forced to invest in toxic debt, the European Central Bank is set to lose its independence. A currency crisis is imminent. Already, former Bundesbank President Axel Weber and the ECB's chief economist, Juergen Stark, have resigned in protest.
Where does that leave German taxpayers? First, the culture of monetary stability is in peril. Second, the German share of the so-called assistance packages for the euro area amounts to almost €300 billion (Dh1.52 trillion), which means a liability risk of about €3,600 per capita. Third, when euro bonds inevitably come along, they will increase the interest expenses of Germany by as much as €40 billion a year. And fourth, tax increases loom to cover the assumed liability risks.
Neither fair nor effective
Those scenarios are simply unacceptable for German taxpayers. The measures taken by European governments are neither fair nor effective. We should finally stop trying to fight old debt by issuing new bonds. Politicians must find the strength to admit that they have gone the wrong way. Increasing the lending capacity of the European Financial Stability Facility and the plan to establish a permanent European Stability Mechanism will only take us further in the wrong direction. Instead, governments need to turn around.
To this end, the European Union should grant no further bailout loans to Greece, which must start negotiations with its creditors as soon as possible to finally restructure its public debt.
The International Monetary Fund, the London Club and the Paris Club are certainly institutions that can moderate and assist in negotiations to restructure debts. In addition, banks and insurance companies have been aware of the current Greek problems for years. And according to a recent report by Goldman Sachs Group Inc., most banks could cope with a "haircut" better than is commonly assumed.
That isn't to belittle the consequences of a writedown. Restructuring Greek debts would certainly melt the equity of many banks. To let shareholders, rather than taxpayers, bear the losses from banks' investments in sovereign bonds is just fair.
If those losses make it necessary to recapitalise certain lenders, this might be done by taxpayers. In such cases, taxpayers would become transitional shareholders, which would be cheaper in the short term and more promising in the long term than just protecting existing shareholders from losses.
The restructuring of Greek debt shouldn't be postponed by expensive rescue packages. It is a welcome sign that the German coalition of Christian Democrats and Free Democrats is now seriously considering a Greek default scenario. Only binding budget rules can prevent the euro area's taxpayers from becoming the lenders of last resort for governments.
Karl Heinz Daeke is president of the German Taxpayers' Association in Berlin.
