Daniel Knowles: The Germans are wary of printing money ... it brings back bad memories
Published 08/11/2011 | 12:56
MY sense of doom is no less tangible today. Silvio Berlusconi faces a vote of confidence this afternoon, as Italian bond yields climb even higher. Italy has had this much debt before, at higher interest rates and serviced it successfully. But the difference today is fear. Fifteen years ago, future growth seemed relatively certain. Now, we are faced with the prospect of another large recession, which would eat into revenues and add ever more to the total pile.
But there is another difference. Before the euro, European countries had their own central banks, able to print as much of the local currency as they liked. With a central bank backing you, it is essentially impossible to default: you can always print money to pay off your debt. Of course, that doesn't mean debts are paid: they are inflated away. But it does stop the speculative attacks which are forcing up Italian interest rates today.
In a monetary union, that option is shut off. The government no longer has the ability to simply create cash; it has to get it, by taxation, borrowing, or not spending. For the first ten years of the eurozone, that was a blessing: it meant that Greeks, Italians, Spaniards and other layabout southern European countries could borrow at much lower interest rates, because traders trusted the Germans to control inflation.