Stay firm

The past two weeks have shown how incredibly powerful financial markets, investment funds and speculators are on the international stock markets. Downgraded credit ratings, collapsing share prices, banks' liquidity problems, wagers on individual European nations - this explosive mixture has kept the world on its toes.

At first, political leaders merely watched in shock. Now, they're slowly beginning to react to the immensely rapid jumps and course changes within the international financial world.

It's very difficult to understand what is happening right now. Even financial experts say markets are acting irrationally and following empty rumors, completely removed from hard economic facts. It's only thanks to the European Central Bank's costly intervention that the European financial sector has managed to stabilize to some degree.

But the threat to the eurozone is by no means over. The overly nervous financial markets are choking off economic growth because they're making it difficult for businesses to procure capital and because they have dampened consumers' willingness to spend money. They are sawing off the very branch they're sitting on. An absurd world. And what next?

The markets demand clear political signals, but they will not tolerate a stronger regulation of ridiculous dealings like short-selling or the taxation of reckless transactions. There appears to be only one political signal the markets accept: "We, the states and the taxpayers, assume the risk, while you, the participants in the financial markets, continue to gamble in your casinos and divide the gains." That cannot and should not work.

Billionaire George Soros has repeatedly demanded that the eurozone's debt be divided among all eurozone nations in the form of joint bonds. For Germany and other AAA-rated nations, that would mean a rise in the cost of giving out state bonds. Bankrupt countries would no longer have an incentive to save money and to help themselves.

Which is why Chancellor Angela Merkel refuses the so-called 'eurobonds'. She should stick to her guns when she meets with French President Nicolas Sarkozy next week. Soros has criticized Merkel as being half-hearted, but she is merely being cautious when distributing taxpayers' money to buyers of risky state bonds.

Besides, the smart billionaire must know that something akin to 'eurobonds' has been around for a while. The European Financial Stability Facility (EFSF), a company based in Luxemburg and owned by the 17 eurozone nations, borrows money on the capital markets, backed by the owners' guarantees. It is issued a AAA rating by relevant credit rating agencies. They all carry the risk. The difference to joint bonds is minimal. And next year, the European Stability Mechanism (ESM), an institution that functions like a large bank and will also borrow money for all eurozone countries, begins its work.

Merkel, Sarkozy and other European leaders must now stay on course, reduce state deficits and provide the currency union with clear, strict rules. Staying on course can be a signal for markets, too. The political establishment should not drift but take its cue from Nobel-prize winning German economist Reinhard Selten, who has said it's not too late to contain the problems on the financial markets.

Giving up the common currency is no option because on their own, European states would be even more helpless, at the mercy of the financial markets. Without the euro, Greece would have long been insolvent. Without the euro, the deutsche mark would be so expensive that all over the world, few people would be able to buy products from Germany's major export market. Excluding individual nations from the eurozone might bring a financial advantage, but politically, it's not enforceable.

In the long run, EU countries must aim for balanced state budgets and low debt. If you don't have to sell state bonds, you can't fall prey to speculators. There is still a long way to go, according to Selten. For centuries, states have had the tendency to get into debt and overspend, he said, and that has to change.

There must be a clear signal: we will come up with a European debt limit that will at least make new debt more difficult.

Author: Bernd Riegert / db
Editor: Martin Kuebler