Someone Needs to Open Up a Can of Whup Ass on the Krauts

The periphery in Europe is experience contracting GDP and a debt crisis. The most recent case is that of Portugal, which is now asking for an EU bailout.

Unfortunately the conditions of the bailout are always the same Teutonic prescription:

• Austerity budgets, which hike taxes and cut spending.
• Paying off the banks that lent the money to the governments at 100¢ on the dollar.

The problem that this creates is:

• Social instability.
• Further GDP contraction, which increases debt load relative to the GDP.
• Declining tax revenues.

The prescription for these problems is:

• Austerity budgets, which hike taxes and cut spending.
• Paying off the banks that lent the money to the governments at 100 ¢ on the dollar.

Rinse, lather, repeat.

The problem here is two-fold, and they are both of German origin:

• The Germans have never gotten over their bout with hyperinflation in the 1920s, and so feel that inflation is the only battle to fight.
• This also, at German insistence, got baked into both the Euro and the European Central Bank (ECB), which has no mandate to do anything by keep inflation low.  Unlike the Fed it has no mission to minimize unemployment as well.
• There is a complete unwillingness by the EU and the ECB to allow for hearcuts on the bondholders, which (surprise) appear to largely be the German banks.

This  is why, on the basis of spiking commodity prices, driven largely by the Libya conflict, the ECB has just raised its benchmark rate.

The thing here is that there is an awful lot of pain being inflicted to support German philosophy^*, as well as supporting the bad debts of their banks, which would be insolvent by any realistic evaluation of this debt.

When someone big enough^† finally tells the German banks to go pound sand, things should get interesting.

^*Which, according to my physicist brother, is also why quantum mechanics such a pain, the the formative texts were written by Germans, who felt an obligation to be obscure and confusing.
^†And I don't mean Spain big. If the new government in Ireland gives a 50¢ haircut to the bond holders, the Germans will have a banking experience to rival our S&L crisis of the 1980s.