The fact that economies across Europe are stalling at the same time that many European governments are finding it hard to sell bonds is a bit of a mystery.
If the people of Spain, for example, are slowing their spending and saving more of their income, that understandably slows the Spanish economy.
But it should also mean there is more of an appetite for Spanish bonds, as all those new savers need somewhere to put their money. Instead, what we’re seeing is Spain’s interest rates — and Italy’s interest rates — keep rising.
In the United States, the opposite occurred. A collapse of housing prices led to sharply higher savings, lower private lending and lower spending. This put the economy into a recession but also put downward pressure on interest rates on government debt . Right now the Treasury Department has no problem selling government bonds with yields that barely exist.
Richard Koo of the Nomura Research Institute believes the problem is that Spanish savers — and Spanish financial institutions — don’t need to recycle their euros into Spanish bonds. They can buy German bonds instead. This means Spanish savings cannot be used to fund Spanish government spending, which means that spending must decline, further slowing the economy.
To put it differently, the German government is using its relative financial health to raid the wealth of its euro-zone neighbors. The German government is spending the savings of the nations on the periphery of Europe.
Koo thinks this should be ended immediately, with a ban on euro-zone governments selling bonds to citizens of other countries.
“Allowing only the citizens of a nation to hold that government’s debt would, for example, prevent the investment of Spanish savings in German government debt. Most of the Spanish savings that have been used to buy other countries’ government debt would therefore return to Spain,” Koo writes.
Koo thinks the repatriation of savings would push interest rates in Italy and Spain down to U.S. and UK levels. That might be a bit too optimistic. After all, the euro zone countries would still lack monetary sovereignty, putting them at the mercy of the European Central Bank .
Using the European Union to restrict the free flow of capital may not be a politically viable idea. The idea is contrary to the very idea of a united Europe.
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