From a magnificent article by Philipp Bagus – Why Is There a Euro Crisis?
Today’s banks are not free-market institutions. They live in a symbiosis with governments that they are financing. The banks’ survival depends on privileges and government interventions. Such an intervention explains the unusual stock gains. On Wednesday night, an EU summit had limited the losses that European banks will take for financing the irresponsible Greek government to 50 percent. Moreover, the summit showed that the European political elite is willing to keep the game going and continue to bail out the government of Greece and other peripheral countries. Everyone who receives money from the Greek government benefits from the bailout: Greek public employees, pensioners, unemployed, subsidized sectors, Greek banks — but also French and German banks.
Europeans politicians want the euro to survive. For it to do so, they think that they have to rescue irresponsible governments with public money. Banks are the main creditors of such governments. Thus, bank stocks soared.
The spending mess goes in a circle. Banks have financed irresponsible governments such as that of Greece. Now the Greek government partially defaults. As a consequence, European governments rescue banks by bailing them out directly or by giving loans to the Greek government. Banks can then continue to finance governments (the loans to the Greek government and others). But who, in the end, is really paying for this whole mess? That is the end of our story. Let us begin with the origin that coincides with beneficiaries of the last EU summit: the banking system.
The vast majority of commentary — particularly this week’s extremely disappointing Economist magazine — crassly neglects the tight nexus between banks and the state which has funded politician’s unrealistic promises for a generation through currency debasement. It’s good to see Philipp Bagus — a German economist working in Spain — making a case which is sadly lacking elsewhere.