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If the state can't afford it, the money is borrowed from the Central Bank.
Not in the Eurozone, it isn't.
The most important consequence of running the state like a private firm is that the state should not be in the business of providing free or implicit guarantees of any kind, as these are large "contingent liabilities" threatening to bankrupt the state. The threat of bankruptcy is real, as the state must fund itself by borrowing from private lenders, unable as it is to create money to fund necessary expenses deriving from the exercising of implicit guarantees. One alternative to bankruptcy is default, but this is considered unthinkable as defaulting on obligations to fellow EU member states is "uneuropean". In addition, countries with a large primary trade deficit may find it impossible even to default.

So, what kinds of implicit guarantees are Eurozone governments providing that they shouldn't be in the business of providing? I can think of half a dozen off the top of my head:

  • deposit insurance for banks
  • granting limited liability to businesses
  • disaster relief
  • access to health care
  • access to education
  • access to legal redress
  • public safety

All of these are implicit guarantees that every citizen in Europe expects to enjoy relatively free of charge. These are large contingent liabilities of the state. Any and all of them could not be undertaken by a private entity that didn't charge hefty fees up front and wasn't adequately capitalised in case a particularly large claim presented itself. Would you pay a savings deposit insurance premium to an inadequately capitalised insurance company? (not that "sophisticated investors" didn't do exactly that when they bought CDS "protection" over the past 10 years) Would you incur risks with a full-liability entity having less capital than your potential loss? Would you trust you can be rescued from a disaster by an entity without the capital and operating income to actually fund a rescue operation? How about health insurance from an entity without the resources to pay for the treatment? How about your right to file a complaint to an entity without the necessary money to operate a grievance handling system? How about contracting physical security or firefighting services from an entity without the operating income to actually deploy security or firefighters?


I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Sun Mar 17th, 2013 at 10:15:57 AM EST
[ Parent ]
Not in the Eurozone, it isn't.

Remind me never to join the Eurozone. Oh yeah, I already knew that.

Quite frankly, I'm shocked. When I first heard this on the radio I just couldn't believe it. It had to be some kind of misunderstanding. While I'm no expert, to me this feels like the fucking stupidest thing since Lehman was allowed to fail.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun Mar 17th, 2013 at 10:20:49 AM EST
[ Parent ]
Would you pay a savings deposit insurance premium to an inadequately capitalised insurance company?

Events demonstrated that this is just what I and millions of home buyers were forced to do in the USA over the last several decades when we bought Private Mortgage Insurance for our home loans. The problem is that, without having a Central Bank as a willing backstop, the amount of liquid reserves that would have been required to be held to protect against what, in fact, happened in September-October 2008 would be so large that having them in the form of liquid reserves would probably tank the economy all by itself. At least the FED did what it had to do. Now we are seeing the consequences that can result from pretending that neither the reserves nor the willing Central Bank are necessary.

And this is all over €30 billion and being able to maintain the pretense necessary for the existing political paradigm, especially in Germany. Merkel et al need to think very seriously and very quickly just how much the Euro and the Eurozone are worth to Germany as the resulting shit storm is likely to sweep both away, along with who knows what else.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 17th, 2013 at 02:12:44 PM EST
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