Friday, April 20, 2012

I Told You So (and Yes, a Lot of Other People Told You So Too)

The Euro rescue plan … is already running out of money.

The good news is that this took months instead of weeks or days.

The bad news is that this was so easily predictable.

In theory, lending the local banks money they could in turn lend to the government at a profit buys time for the governments to enact overhauls that can lure back foreign investors.

That is essential: Both the Spanish and Italian economies run deficits with the rest of the world; their businesses and citizens don't generate enough surpluses on their own to finance the government.

But enticing foreigners has proved hard. Spain has relaxed its fiscal targets amid worries about the effect of austerity on its economy, and the International Monetary Fund projected Tuesday that Italy wouldn't meet its 2012 deficit target.

This isn’t hard. In a nutshell, here’s what the plan was:

… Banks' borrowing from the ECB in order to lend to their governments …

Umm … where did the European Central Bank (ECB) get the money? From governments.

This is childish.

Here’s what happens in my household: I control most of the earning power, my wife controls most of the spending. Typical, right? So, if I say the family needs to cut back because short on money, my kids volunteer to do extra chores (for which my wife would pay them), and then offer to contribute it to me to pay for, say, a vacation.

Obviously, this sounds like a good plan to a kid, but the flaws to an adult are fairly easy to spot.

But, this is exactly what Europe is doing: the government of, say, Spain is me, the ECB is my wife, and the private banks are my kids. The analogy seems to be lost on politicians.

You might add the detail that Germany is a rich relative. Then the analogy is that the rich relative refuses to loan any more money to me because I’m irresponsible, so they loan to my wife instead.

And then they wonder why their problems don’t go away. Solving this sort of problem isn’t rocket science; failing to address it in this particular way is … fraud.

Read the whole thing, entitled “Europe’s Rescue Plan Falters” in the April 18 issue of The Wall Street Journal.

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