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The League of Extraordinarily Fed-Up Bavarians

Bavarians, who carry an outsized share of political influence in Germany, know like every reasonably intelligent person that the half-life of any Greek rescue will be as short as those elements born in a particle accelerator.

Please understand the deep truth coming. It is not personal.

Underpinning the very legitimate economic discussion of fiscal multipliers and cascading negative externalities that make the entire Greco-EU crisis outcome largely unpredictable and pregnant with unintended high impact possibilities is a very familiar story. At the core, this is a business deal gone wrong.

Greece is a distressed debt, which means that it is unable to settle current liabilities with current cash plus borrowing. As economists and others correctly note, to turn this situation around requires capital infusions. But this must come at a price. The price is that the Greek management team (Syriza) have to live under tight constraints until solvency is restored. This is the explicit deal made in every distressed situation, with context-specific details adding some variations.

For some reason, Syriza doesn't think they should be be obligated to follow any demands in exchange for capital further capital infusions. In fact, they have gone out of their way to reinforce the belief that no creditor should have any reasonable expectation of seeing their capital returned. So creditors have pretty much washed their hands until management is replaced with a team that respects their very legitimate interests.

The ultimate goal is that Greece right-sizes, which means getting current revenues in line with expenses. So Greece, just like any insolvent and distressed business, has to figure their cash position and divide it across liabilities of the operating budget and debt service. So parts of the operating budget will be dropped as will debt service burdens.

Without capital infusion, this must and will happen whether or not the government defaults or not. They will default, in implicit or explicit ways, as they are out of money. You can’t miracle a financial fix to such a mess with no money.

Long term, there has to be restructuring of budgets and debt service default or no default. The social contracts between 1) debtors and creditors, 2) older pensioners and younger earners, 3) those who work versus those on the dole, and 4) businesses and bureaucracies are going to swirl down the toilet. These promises will not be kept and as much truth as can be salvaged will be extracted from the lies. It can't be helped. Creditors will be chastened for being reckless, the public dole will have much less swill spooned into it, and the majority will be much, much poorer. People that have not had to work in the past will have to work. It will happen whether or not Greece stays in the EU or not, or keeps the EUR or goes to the Drachma. There is no solution to the problem of Greek debt without the majority of Greeks (the aggregate debtors) getting massively, massively poorer in the short-term. This is a part of the reset associated with any default process.

Economics and public policy stresses the social impact. Fair enough. It is a tragedy of the commons. But such is the fuel of history and its downturns. Yet misses the fundamental reality: There is an individual creditor with no expectation of being repaid and getting the feeling of a major double-crossed coming has every right to walk away. This is business and it has a discipline that seems to escape the blankness of theory.

I understand that this is inflammatory. It is not meant to be. It is simply the truth. It is has nothing to do with Germany or the north versus the south. The sooner the populace is told this truth the better.

It just so happens that Germans are some of the most brutally honest people out there—and also on the hook for a bunch of Greek bad debt. So their view of matters is a natural incendiary to the Greeks.

This really isn’t good enough. At all. There is a huge bifurcation that divides Germanic people. The rough cut of this division is between the North (Prussian) and the South (Bavarian)—with the other free-floating Germanic components of the brand-new German nation moving constantly between those two poles. Prussia and Bavaria are as different as any two European countries. Case in point, the Bavarian and the similar Swabian dialect are pretty much not understood by other Germans.

Northern Germany is a very different place economy-wise (grim and gray) and I don't think it has ever been that much different. The culture there was deeply rooted in feudal/Junker traditions (rather like British gin-drinkers) and there's a distinctly salute-and-chain-of-command feel about it. And of course it was mostly Protestant, at least before growing numbers turned their back on God.

Bavaria is nothing like this. Bavaria (I use the term in the broadest possible sense: i.e. South East Germany plus bits of northern Austria) is rich, opulent, very bourgeois, more sunny and green. And it has seen very little actual fighting since the end of the 30 Years War. On the surface, the Bavarians have a reputation as conservative, rural, Roman Catholics of the traditional, Benedict XVI flavor. Once you get inside, the people are relaxed, cheerful, oversexed, and quite proud to indulge in all kind of fun activities despite being – outwardly – solidly bourgeois and traditional. This interprets into a bit of Wagner here, a torchlight parade there, but it's mostly clean streets, flowered balconies, tidy houses, well regulated prostitution and lots of free time to indulge in sex, beer and chopped pork.

There is some noise orbiting this core distinction. Swabians are seen stingy, industrious, punctual and reliable, knowing how much the good and bad of these stereotypes do not match fact. There are wine drinkers in the west, etc. All that said, it is Bavaria that has an outsized share in controlling the politics. There is nothing dour and sour about Bavaria. I expiate at such length because simply put, the Germans with their hands on the level are reasonable people that are DONE with Greece.

Bavarians, who carry that outsized share of influence, know like every reasonably intelligent person that the half-life of any Greek rescue will be as short as those elements born in a particle accelerator. Credit sure knows it. Check out the role reversal in Europe’s CDS in the last few days.

This is a typical post-1971 sovereign insolvency: a slow, small, and chronic problem that causes spreads to blow-out across risk.

To me, the real oddity here is the weird squeamishness that seems to hold sway so unpredictably over Northern Europe, post-1945. I mean even now, Bavarians are Bavarians and Berliners are Berliners very loosely connected under the umbrella of a new-born German nation. These same Germans who have little in common at least live under a fiscal union that accepts the role of Bavarian influence because of Bavarian largesse. And all these Germanic people are tacitly expected to pony up for Greece who does not accept any role for Bavarian or German or any other creditor that has ponied up time and time again.

For what? I think the expectation is that an incredibly bland, shallow appeal to a vague supra-national euro-humanism is worth fighting for. Fighting for a negative birthrate; fighting for a long-term dependence on the dole everywhere you look; fighting for a thick layer of scolding for having a severe distaste for this sorry situation. The advent of radio after WWI, television after WWII, and finally the uber-connectedness of social media completely rebooted the foundations underpinning society, diminishing the role of any kind of humanism, classically defined. In its place stands the overarching directive to never have an out-of-consensus opinion and never, ever offend anyone that actually deserves to be called to task.

My read is that the squeamishness is over and the European Union will reconstitute on solid ground. Honestly, here is where the contracts that underpin social unity should fall apart. What is worth salvaging should be salvaged and will be salvaged. The rest is trash.

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