With the "Merkel memorandum", The Economist has joined the rows of other commentators on the cost of a euro breakup. The costs are quantified as accounting losses on bailout loans, ECB's bond holdings and Target2 balances, and possibly bank bailouts. Is this all the euro crisis is about? Hardly. The numbers the Economist bases its argument on are accounting losses and fall short of the cost-benefit analysis it claims to be. Here are a few arguments why Frau Merkel will not be impressed by accounting losses:
Losses on bailout loans. It is correct that the paid-out loans may not be repaid as scheduled, prompting Eurostat to reassess their recording as financial investment by creditor countries. But creditor countries could find ways to avoid taking an accounting losses, such as by rescheduling the loans. As the paid-out loans are already funded, a breakup does not increase creditors' gross debt. With debt and deficit not heavily affected, what to fret about these accounting losses?
SMP losses. It is correct that exiting countries may restructure their government bonds, reducing their face value. But ECB has bought most bonds at prices below their face value, making it unlikely that the accounting loss is as large as the full exposure.
Target2 losses. It is correct that the central banks of exiting countries are likely to become insolvent and may trigger an accounting loss to ECB. But, as with accounting losses on bailout loans, why to fret about it? ECB has large reserves and considerable earning power, and---like other central banks---could remain effective despite being balance sheet insolvent.
Therefore, Frau Merkel will not take interest in accounting losses. She will look at accounting losses in the same way as in other policy areas. And so may her electorate. Who cried out about EUR200 billion or so in subsidies spent on nuclear energy since 1950 when Frau Merkel decided to accelerate the phase-out of nuclear power generation?
Losses on bailout loans. It is correct that the paid-out loans may not be repaid as scheduled, prompting Eurostat to reassess their recording as financial investment by creditor countries. But creditor countries could find ways to avoid taking an accounting losses, such as by rescheduling the loans. As the paid-out loans are already funded, a breakup does not increase creditors' gross debt. With debt and deficit not heavily affected, what to fret about these accounting losses?
SMP losses. It is correct that exiting countries may restructure their government bonds, reducing their face value. But ECB has bought most bonds at prices below their face value, making it unlikely that the accounting loss is as large as the full exposure.
Target2 losses. It is correct that the central banks of exiting countries are likely to become insolvent and may trigger an accounting loss to ECB. But, as with accounting losses on bailout loans, why to fret about it? ECB has large reserves and considerable earning power, and---like other central banks---could remain effective despite being balance sheet insolvent.
Therefore, Frau Merkel will not take interest in accounting losses. She will look at accounting losses in the same way as in other policy areas. And so may her electorate. Who cried out about EUR200 billion or so in subsidies spent on nuclear energy since 1950 when Frau Merkel decided to accelerate the phase-out of nuclear power generation?
