The dollar is correcting downward after a big move up earlier this week, in part because German Finance Minister Steinbrueck announced yesterday that Germany may be stepping up to the plate to offer “emergency” financial aid and leadership to the rest of the euro zone countries.


A German initiative could be a watershed moment, since the ECB lacks the authority to and operating capability to assist on the fiscal front. The euro zone lacks institutional depth—it has no combined Treasury/Ministry of Finance, let alone a State Department and the other functions of a political union. It's been said that the euro zone is little more than a customs union with a common currency, so addressing this shortcoming would be a major step forward.


This being said, a dose of skepticism is still in order. Today the Bundesbank in the monthly report renewed its usual statements that the German government must promise to reduce deficits once the crisis is over to maintain investor confidence. 


Past experience has shown that it is easier to reach a consensus on expanding deficit spending than on the necessary consolidation of public finances afterwards, the report said. After all, confidence in the long-term sustainability of public finances is a condition for the success of government stimulus measures.


So how would a German rescue plan line up with the Bundesbank’s strict ideas about keeping to the Stability

Pact, since Germany is already at the 3% cap? Clearly if Germany is going to buy the paper of distressed

countries (Portugal, Italy, Ireland, Greece, Spain), it will have to get a waiver from the EC and the ECB.

This is kind of like a pass and doesn’t address the source of the most recent crisis, Eastern Europe.


It’s unthinkable that Germany would rescue Hungary, Poland, the Czech Republic and other nonmembers, but it may become necessary because these countries fund their liabilities (via the large European banks) in dollars and euros so when their currencies come under pressure due to the investor concerns regarding their fiscal positions, the risk of them defaulting grows.


The UK has become the first country to admit out loud that it has nationalized some banks. According to the Office of National Statistics, it will start including the liabilities of Royal Bank of Scotland and Lloyds on the government balance sheet, meaning they are “public sector entities.”


Technically this happened last October with the injection of capital giving the government a majority

share. How much this adds to the public debt is still unknown, but it’s probably on the order of £1

to £1.5 trillion, or 70-100% of GDP.