Imagine you work for Dijsselbloem at the Dutch treasury. Your pay has been frozen for four years,so over those years you lost some 8% purchasing power to inflation. But currently inflation is at 3% and rising; you’ll lose even more income this year. Your house lost 40,000 euro in value but your mortgage of course didn’t. (At this moment, almost 25% of Dutch households have a house that is worth less than the mortgage on it.) Your spouse was asked to work fewer hours. Your pension fund has cut pensions repeatedly to meet its obligations under law. The government is cutting back services, everything from health care to child care is becoming much more expensive. You’re having trouble making ends meet.
You’re asked to work out a draft on saving Cyprus. You’re aware of how your austerity is not mirrored in Cyprus at all, it has run a 6% deficit over the last four years, has increased pensions and salaries of your colleagues in the Cypriot civil service. Has tolerated banks to make extremely risky investments in Greek assets in 2010. And so on.
You know that you’re going to borrow billions to save that Cyprus. You don’t know if that will change anything about Cyprus or that you’re ever going to get your money back.
How would you feel?
Mr. Geert Wilders will tell you to vote for him. He guarantees no more bailouts. Maybe even an exit from the Euro. His anger spouted on television resonates with your fear. You’re not going to vote for him but you know plenty of people who are just as angry and fearful as you are. You’re not going to vote for him because you know any government with him in it will likely crash Cyprus and Greece, not giving a hoot for moral hazard.
You’re talking about one moral hazard. How about that moral hazard?
We’re nowhere near the Mellon doctrine. A test balloon was floated to see if what amounts to two or three years of inflated interest rates (6 to 8%) could be bailed in even from insured depositors. That was shot down quickly but served a purpose: it demonstrated that these sorts of measures can count on political support in creditor Euro countries where people are upset that once more and despite various promises they have to borrow billions to stabilize other countries. Dijsselbloem is a bit of a hero in Germany and the Netherlands for making their case and seems to enjoy the full support of Schäuble. Dijsselbloem is an ideal proxy German.
There are two important political factors at play, one is that demanding further bailouts is political poison in the north, hopefully that is obvious now. If we want to see populists win elections all we need to do is use their debt to bail out others in full. The other related one is that there is no banking union and we’re not obliged by treaty to save depositors or sovereigns. That we still do save these is a sign that the Eurozone will not court moral hazard but will also not court populist hazard.
Its a fine balancing act that most economists seem to have trouble understanding the political angle of. There’s apparently no impetus to look at the political reactions in creditor nations as their debt grows but also as their own governments are forced to cut deeply in their own spending.
Britain isn’t in the EZ and many who write in the FT would write an entirely different story if they personally, like the civil servant above, felt the heat. Of course many people in Britain feel the heat yet have no reason to link it to the politics of specific other countries.