Sunday, August 21, 2011

Wanna Bet?

. Sunday, August 21, 2011


“Politics cannot and will not simply follow the markets,” [Merkel] told German public television on Sunday in her first interview after returning from holiday a week ago. “The markets want to force us into doing certain things - and that we won’t do.”


That is in reference to eurobonds, which Merkel (along with 75% of German citizens) does not support. She understandably does not want to share Germany's credit rating with heavily indebted countries. But markets have been making Germany make political decisions for several years now, and that will continue. Merkel never wanted the EFSF. Merkel never wanted the compromising of the ECB. Merkel never wanted Germany to be on the hook for the whole eurozone. But markets have forced her hand at every juncture, and is still.

The current EU policy of muddling through is precisely about "following the markets". Intervention is only done when markets force the hands of EU leaders. This makes perfect sense in game theory where every intervention is unpopular with at least one set of voters. In such a model markets would not only influence politics, politics would be very difficult without them. The fact that markets can alter the equilibrium makes it a very important political actor. Anti-neoliberals may view this as a tragedy ("markets undermining democracy"), but recall that the problem has arguably gotten this dire because of too little bond market discipline during the 2000s, not too much.

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