What are Germans supposed to make of this widely-reported analysis by USB?
Even if a stronger country like Germany were to leave [the Euro], UBS still thinks it is going to set every German back by about EUR6,000 to EUR8,000 in the first year and then around EUR3,500 to EUR4,500 per person in every year thereafter. A stronger euro-zone country wouldn't face sovereign default but it is still vulnerable to corporate default, recapitalization of the banking system and a collapse of international trade.
By contrast, each German would only have to cough up EUR1,000 just once to bail out Greece, Ireland and Portugal entirely, according to UBS's analysis.If it were just a matter of self-interest, German politicians would be falling all over each other, promising to bail out the indebted European peripherals. But this would contradict the fundamental world view shared by nearly every voter: saving is good and borrowing is bad. The indebted countries borrowed too much, enjoying their decade of fun, and it would be immoral to ask the upright, productive citizens of the wealthier north to foot the bill. Wouldn’t this just encourage even worse behavior in the future?
Put morality aside for a moment. The economically rational solution is to wipe out the debt overhang as rapidly as possible, spreading the costs on the basis of ability to pay and the maintenance of political cohesion. The peripherals, and especially their wheeler-dealer classes, would take a hit, and so would banks and investors in the north. Taxpayers in the wealthier countries would have to dig into their pockets to recapitalize (and possibly take possession of) financial institutions unable to cope with big writedowns. All of this would be done quickly, with the understanding that, once growth resumes, it will take only a few years to make everyone better off again. After the mess has been cleaned up attention can be given to new rules, above all transparency, that will make it less likely that the worst credit excesses of the past decade will be repeated.
So much for rationality. It is ideology that bellows the loudest, against the paralysis of a fragmented political system in Europe that makes it difficult to agree on any plan that entails big-stakes cost-sharing.
I can understand why Keynes is an epithet in German political discourse. If you ask, people will say he was too tolerant of inflation, although Skidelsky’s biography makes it clear that Keynes could be an inflation hawk when hawks were needed in the aviary. No, Keynes’ real sin, and his most radical element, is that he saw the credit relationship in morally neutral terms. For him, lending and borrowing was not about vice, virtue or any other theological category. It was simply a means, sometimes well-undertaken, sometimes not, for shifting resources to better uses, meeting human needs and promoting the development of economic life. From The Economic Consequences of the Peace to the Bancor plan, Keynes called for a balanced, burden-sharing approach to credit crises: lenders and borrowers alike should adjust to cast off the effects of a bust and make possible a return to growth. The wealth of the creditors may give them more clout, but there is no reasonable basis for the argument that those who borrowed foolishly must be squeezed to the limit, while those who lent foolishly should be made whole.
(In fairness, German political leaders, from Merkel and Schäuble on down, have made it clear that banks holding the sovereign debt of peripherals should take a hit—but their demands on the indebted countries make it clear that the balance of hittedness should fall mainly on the south.)
Keynes would not be surprised by the UBS numbers. He would be horrified that his grandchildren (or their grandchildren), who should be enjoying a higher standard of living than any he had known, were still in the grips of atavistic economic doctrines.