The religious bazooka

Yesterday, I said out that even apparently rational people try to appease fictional deities when faced with uncertainty. I was hoping someone would point out that this is just what Europe’s finance ministers and the ECB are doing.
We can interpret their “bazooka” as a religious exercise - designed to reward virtue and punish vice, regardless of consequences.
The reward goes to virtuous savers, those who hold PIIGS debt; as John says, bail-outs are better for creditors than debtors. This, though, raises a moral hazard problem; rewarding people for making bad loans encourages them to make more in future. 
The punishment goes to speculators. The “wolf pack” which had shorted stocks, PIIGS debt and CDSs on Friday got shafted.
But there’s also punishment for “profligate” borrowers, who are expected to slash their deficits; ministers agree that “plans for fiscal consolidation and structural reforms will be accelerated.” Remember, the bail-out addresses the liquidity problem, by ensuring there’ll be a market in PIIGS bonds but the solvency problem - that the PIIGS are borrowing heavily - remains.
However, as I’ve pointed out, the “excess” government borrowing in southern Europe is, to some extent, the counterpart of “excess” private saving in the north. Which raises the possibility that PIIGS’ problems could be solved in part by reflation in the north. If northerners were to spend more, PIIGS would enjoy increased demand and thus tax revenues. And the problem of high relative unit wage costs in Portugal and Greece can, in theory, be addressed by reflation in the north, not just deflation in the south.
This, though, is what the ECB is 100% against. Although it seems happy to bring credit risk onto its balance sheet by buying Greek debt, if necessary, it is opposed to monetary expansion - despite the fact that the euro area’s money stock is shrinking.  It seems to be pursuing the course of virtue - monetary rectitude and protecting savers from inflation - even though this condemns Europe to deflation.
For a project that is supposedly secular, this desire to pursue virtue and punish sinners, irrespective of consequences, seems rather Calvinist.

Comments

[Luis Enrique]

how much difference does it make that reflation in the North punishes all savers doesn't it, not just those foolish enough to lend to a PIG?

I'm a bit nervous about your mechanism. Maybe reflation in the North doesn't do that much for piggy GDP growth (because the North doesn't important that much from the South) meanwhile the North's reduced demand for bonds means the South has to offer higher yields, meaning the cost of rolling over its debt eats more GDP? Or something. (this last bit is prob one of those comments I wish to rescind about 5 min after hitting post)

[Left Outside]

But Luis, the PIIGS need relative deflation to regain competitiveness. Actual deflation is pretty horrific, especially with the debt burden they suffer. But if they can have modest inflation or price stability coupled with higher inflation in the north then they get that relative deflation without actual deflation.

The ECB seem dead set against more QE and from I understand what they've done appears to be more fiscal than monetary. They need to fire up the printing press, but I think a more likely outcome is that the south are going to be crucified on a cross of inflation targeting.

[ortega]

"I am most often irritated by those who attack the bishop but somehow fall for the securities analyst."
Nassim Taleb, The Black Swan

[Luis Enrique]

LO,

sure, I appreciate the benefits of a scenario where the North inflates faster than the South, I merely meant to say that when talking about the ECB wanting to protect savers from inflation, it's bigger set of savers than "the virtuous savers, those who hold PIIGS debt" (whom one might say deserve some punishment for lending to PIIGS).

[chris]

@ Luis - German imported €29bn of goods and services from Spain last year, which is about 2.8% of Spain's GDP. So a percentage point rise in German spending generally would add just under 0.3% to Spain's GDP. It's not a vast sum, but nor is it insignificant - hence my use of the qualifier "in part."
@ Ortega - you've never heard my opinion of securities analysts.

[Luis Enrique]

thanks Chris

[suvie]

The ECB seem dead set against more QE and from I understand what they've done appears
to be more fiscal than monetary. They need to fire up the printing press,
but I think a more likely outcome is that the south are going to
be crucified on a cross of inflation targeting.

[Paul Sagar]

"For a project that is supposedly secular, this desire to pursue virtue and punish sinners, irrespective of consequences, seems rather Calvinist."

That's what you get when the bloody Germans run the show.

[CypePevaply]

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