The Financial Times ran a good overview on November 17th about the growing isolation of Angela Merkel among European leaders on the debt question. Most commentary presents the German position as hostile austerity: force the Greek public to pay for their debt crimes with austerity and poverty for years to come. There's something to that - much of the German public seems to feel that they sacrificed themselves (with few if any wage increases and service cuts throughout the past ten years) while other countries like Greece did not. But in fact the current German government is also trying to force private investors to share some of the cost. This has been an enormous problem for Western societies, as the financial sector gets governments to pass on the cost of their mistakes to citizens, who pay several times over - actual money and guarantees, zero-cost access to funds for banks that prop restored profits, public service cuts, austerity-induced low growth, and reduced investment in innovation for the future.
Today's FT reports that "France and Germany agree [on a] mechanism for future crises."This means that governments won't be able to bail out investors at 100 cents on the Euro simply because they have been bought or intimidated. Investors will have to share the downside with the public that had previously made nothing on the investments that brought the crisis on.
The main feature of the proposed new system - dubbed the European Stabilisation Mechanism -- will be for future borrowing by eurozone members to include collective action clauses that would involve bondholders in any eventual debt restructuring.
Or does it? There are two major caveats. First, it doesn't take effect until 2013. This is a deliberate "message to the markets," which always threaten to drive up interest rates in an attempt to lock in their desired hefty margins. This invites another three years of "moral hazard," in which investors can continue to take risks with other people's (tax) money. Nothing about investor behavior need change.
Second, the eventual mechanism is not automatic, but will have a first phase in which "a eurozone country with liquidity problems [including private sector liquidity problems] would be able to apply for emergency funding from the ESM subject to a tough fiscal adjustment programme -- as with Ireland or Greece -- without having to restructure its debts or agree a standstill" [sic]. So investors still get to see a country first crush its public sector as a way of rescuing their own lucrative but risky investments. Only in a second stage might investors be asked to share some of the losses their behavior induced.
Even at this stage in the crisis, governments are still letting economies sink under the transfer of private into public losses, which has induced austerity measures to cut now-public debt. Germany got half a loaf, but the other half is austerity-induced decline.