Friday 2011-12-02

The TED spread has been crawling up recently, and rates on european sovereign debt seem to be on a steady increase.

From the perspective of a politician, sovereign debt seems alluring as it usually provides cheap money which can be used to expand the economy (or patronage in some countries). It also occassionally proves nettlesome as loan rates are cheap when the country is expanding, but when the country is in trouble, the rates go up.

In Europe, several countries are in trouble and the rates they pay on debt are going up. What does the decision tree look like for one of these Heads of State?
Raise taxes temporarily Exacerbate recession, control even larger money flows, maybe get fired
Reduce spending temporarily Exacerbate recession, retain control of money flows, maybe get fired
Sell off state assets Ameliorate or avoid recession, lose control of money flows of sold assets, patriots hate you, maybe get fired
Default on the debt Destroy local banks who hold the debt, induce mega-recession, lose job
Leave the euro EU hates you, spout some patriotic rhetoric, maybe get fired, gain control of the money supply = ULTIMATE POWER

Note that all the possible decisions look like losing propositions with regards to job security.

Given that European politicians do not seem willing to sell off state assets, it could be that some are positioning themselves to take advantage of The Final Option.

Of the Euro-zone countries, Belgium and Austria seem to have the strongest eurosceptic parties. Say economies fall further, the odds of a Charismatic rising quickly to power would increase.