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opebo
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« Reply #25 on: November 07, 2011, 11:24:01 am »
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How can this euro thing work without a common fiscal policy?  And if all of this lending by banks to the sickie countries had not occurred, would it be a problem to just let them default?  Someone needs to educate me on this. I feel at sea.

How would the lending 'not have occurred'?  I suppose if it hadn't occurred then there would be nothing to default upon, right?

Actually the don't really need to have a fiscal union, just 100% responsibility for each others bonds.
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« Reply #26 on: November 07, 2011, 11:32:32 am »
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Torie- basically it's a big disaster. I don't think they need fiscal union *necessarily* but they also aren't going to make it with their current mentality.
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« Reply #27 on: November 07, 2011, 02:37:55 pm »
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How can this euro thing work without a common fiscal policy?  And if all of this lending by banks to the sickie countries had not occurred, would it be a problem to just let them default?  Someone needs to educate me on this. I feel at sea.

If the EU was going to be structured as a fiscal union decades ago or if they tried to pull that today countries like Germany would give them the finger and walk away because it would invariably be just a constant stream of transfer payments from countries like Germany to countries like Greece, Spain, Slovakia, etc. That is like asking the United States to go into a fiscal union with Mexico. The people in the US would be rioting in the streets at even the notion of the idea by the US government.
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Gustaf
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« Reply #28 on: November 07, 2011, 02:38:22 pm »
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As I've been saying before, I think a part of the fiscal union discussion misses the point.

Any solution that means a (in practice) permanent obligation from Germany to pay for the Club Med countries MEANS fiscal union, simply becaue Germany can't accept such a solution without also getting to run the public finances of these countries.

That's why I think solutions like Eurobonds or starting the printing presses won't get around the fiscal union issue.

Torie: the problem was that the euro lent credibility to the bad countries. Had Greece been on their own investors would never have entrusted them with this much debt at such low rates. The markets messed up on this one.
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« Reply #29 on: November 07, 2011, 03:27:16 pm »
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Gustaf,

But that depends on what you mean by Germany 'paying' for the Club Med countries. Arguably, simply by being in a currency union with the Club Med countries, Germany is paying for them already, because it is supporting their purchasing power and they are leeching off Germany's purchasing power. Also, the EU has a ton of agricultural subsidies, etc. etc. The free trade zone, movement of labor agreements, even the forced austerity and restructuring are all forms of German subsidy to the weaker countries. So if that's the principle you're after, it's been violated long ago.
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« Reply #30 on: November 07, 2011, 04:46:53 pm »
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Gustaf,

But that depends on what you mean by Germany 'paying' for the Club Med countries. Arguably, simply by being in a currency union with the Club Med countries, Germany is paying for them already, because it is supporting their purchasing power and they are leeching off Germany's purchasing power. Also, the EU has a ton of agricultural subsidies, etc. etc. The free trade zone, movement of labor agreements, even the forced austerity and restructuring are all forms of German subsidy to the weaker countries. So if that's the principle you're after, it's been violated long ago.

True, but that seemed to them at least to be a worthy deal like it was for China and the US. Where they draw the line is when they can actually force Germany to make a direct transfer payment or sign up for a future direct transfer payment.
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« Reply #31 on: November 07, 2011, 05:01:14 pm »
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Gustaf,

But that depends on what you mean by Germany 'paying' for the Club Med countries. Arguably, simply by being in a currency union with the Club Med countries, Germany is paying for them already, because it is supporting their purchasing power and they are leeching off Germany's purchasing power. Also, the EU has a ton of agricultural subsidies, etc. etc. The free trade zone, movement of labor agreements, even the forced austerity and restructuring are all forms of German subsidy to the weaker countries. So if that's the principle you're after, it's been violated long ago.

True, but that seemed to them at least to be a worthy deal like it was for China and the US. Where they draw the line is when they can actually force Germany to make a direct transfer payment or sign up for a future direct transfer payment.

What? China or the US never signed up to any such thing. And the Common Agricultural Policy is direct transfer payment.
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Gustaf
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« Reply #32 on: November 07, 2011, 05:15:27 pm »
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Gustaf,

But that depends on what you mean by Germany 'paying' for the Club Med countries. Arguably, simply by being in a currency union with the Club Med countries, Germany is paying for them already, because it is supporting their purchasing power and they are leeching off Germany's purchasing power. Also, the EU has a ton of agricultural subsidies, etc. etc. The free trade zone, movement of labor agreements, even the forced austerity and restructuring are all forms of German subsidy to the weaker countries. So if that's the principle you're after, it's been violated long ago.

It isn't about what principle I'm after, but what the Germans want.

I don't think agricultural subsidies is relevant because that is a specific program that exists independently of the economy in general.

With purchasing power I assume you mean the fact that the euro is overvalued for the Club Med? That hasn't necessarily been a blessing for them, as we've discussed before (I think you've been hammering this point a lot). Anyway, as we see now, it is hard to maintain a high degree of divergence in economic development/performance within a currency area without creating a lot of political tension. The difference in purchasing power seems to me to be just another aspect of the same underlying issue. 

Basically, the payment wasn't obvious to Germany until now (although I agree with you that it's been there from the start, at least implicitly).
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« Reply #33 on: November 07, 2011, 05:28:29 pm »
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It isn't about what principle I'm after, but what the Germans want.

Oh I'm not saying anything about what Germans want. I agree that they don't like these subsidies... I mean who would? I'm just saying that it's hypocritical to draw the line at subsidy as a principle because it's already been violated several different, major ways.

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I don't think agricultural subsidies is relevant because that is a specific program that exists independently of the economy in general.

Again, that depends on what you means of 'exists independently of the economy in general'. Agriculture is certainly a part of the economy, and it is indeed a huge subsidy, and quite real. But the other things I mentioned: free trade zone, free labor movement, common currency, and certain common governance rules are also a form of subsidy. Not to mention, the ECB subsidizes the national banks of the Club Med countries by giving them risk-free overnight loans.

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With purchasing power I assume you mean the fact that the euro is overvalued for the Club Med? That hasn't necessarily been a blessing for them, as we've discussed before (I think you've been hammering this point a lot). Anyway, as we see now, it is hard to maintain a high degree of divergence in economic development/performance within a currency area without creating a lot of political tension. The difference in purchasing power seems to me to be just another aspect of the same underlying issue.  

Basically, the payment wasn't obvious to Germany until now (although I agree with you that it's been there from the start, at least implicitly).

Yes, it's been there from the start in a big way. And it's an important point, because, the only reason why Germany must complete the circle to avoid catastrophe is because it began drawing the circle in the first place.

Germany is like a human that finds a cute baby pet in the forest, takes it home to raise it. After a few months it has grown big and no longer cute, but since it has been coddled for so long it can no longer raise itself. The choice is to keep raising it, or throw it out into the woods to die. Had it been allowed to remain in the wild in the first place, it would be able to survive on its own, but now it cannot...
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Wonkish1
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« Reply #34 on: November 07, 2011, 05:36:03 pm »
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Gustaf,

But that depends on what you mean by Germany 'paying' for the Club Med countries. Arguably, simply by being in a currency union with the Club Med countries, Germany is paying for them already, because it is supporting their purchasing power and they are leeching off Germany's purchasing power. Also, the EU has a ton of agricultural subsidies, etc. etc. The free trade zone, movement of labor agreements, even the forced austerity and restructuring are all forms of German subsidy to the weaker countries. So if that's the principle you're after, it's been violated long ago.

True, but that seemed to them at least to be a worthy deal like it was for China and the US. Where they draw the line is when they can actually force Germany to make a direct transfer payment or sign up for a future direct transfer payment.

What? China or the US never signed up to any such thing. And the Common Agricultural Policy is direct transfer payment.

Come on you what I mean. China keeping its currency devalued causes their population to subsidize our population through purchasing power so that their exporters can benefit. China elected for the same thing the Germans wanted in creating the EU. The only difference is that Germany signed up for a combined currency and China just pegged theirs.
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« Reply #35 on: November 07, 2011, 05:37:46 pm »
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It isn't about what principle I'm after, but what the Germans want.

Oh I'm not saying anything about what Germans want. I agree that they don't like these subsidies... I mean who would? I'm just saying that it's hypocritical to draw the line at subsidy as a principle because it's already been violated several different, major ways.

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I don't think agricultural subsidies is relevant because that is a specific program that exists independently of the economy in general.

Again, that depends on what you means of 'exists independently of the economy in general'. Agriculture is certainly a part of the economy, and it is indeed a huge subsidy, and quite real. But the other things I mentioned: free trade zone, free labor movement, common currency, and certain common governance rules are also a form of subsidy. Not to mention, the ECB subsidizes the national banks of the Club Med countries by giving them risk-free overnight loans.

Quote
With purchasing power I assume you mean the fact that the euro is overvalued for the Club Med? That hasn't necessarily been a blessing for them, as we've discussed before (I think you've been hammering this point a lot). Anyway, as we see now, it is hard to maintain a high degree of divergence in economic development/performance within a currency area without creating a lot of political tension. The difference in purchasing power seems to me to be just another aspect of the same underlying issue.  

Basically, the payment wasn't obvious to Germany until now (although I agree with you that it's been there from the start, at least implicitly).

Yes, it's been there from the start in a big way. And it's an important point, because, the only reason why Germany must complete the circle to avoid catastrophe is because it began drawing the circle in the first place.

Germany is like a human that finds a cute baby pet in the forest, takes it home to raise it. After a few months it has grown big and no longer cute, but since it has been coddled for so long it can no longer raise itself. The choice is to keep raising it, or throw it out into the woods to die. Had it been allowed to remain in the wild in the first place, it would be able to survive on its own, but now it cannot...

What I mean is that there is a difference between paying X amount of euros to farmers every year (costly as that is) and paying, in general, for whatever debts other countries may accumulate.

Of course, the Germans aren't happy about agriculture either.
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« Reply #36 on: November 07, 2011, 11:18:58 pm »
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True but by starting the 'printing presses' Germany isn't technically paying anything because it isn't German money. It's just currency created out of nothing. The impact on Germany comes from only secondary sources-- by increasing or decreasing the euro exchange rate.
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« Reply #37 on: November 07, 2011, 11:51:09 pm »
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True but by starting the 'printing presses' Germany isn't technically paying anything because it isn't German money. It's just currency created out of nothing. The impact on Germany comes from only secondary sources-- by increasing or decreasing the euro exchange rate.

But since Germany is the biggest economy and since its "currency" was the most undervalued by switching to the Euro you and me both know that inflation would be particularly bad in Germany and they don't even get to benefit from the ECB bond purchases.
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« Reply #38 on: November 07, 2011, 11:59:52 pm »
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But since Germany is the biggest economy and since its "currency" was the most undervalued by switching to the Euro you and me both know that inflation would be particularly bad in Germany and they don't even get to benefit from the ECB bond purchases.

But that's a secondary effect, not a direct effect. Just like, the Euro is devalued simply by Italy's membership inside of it, is a secondary effect. Plus we don't even know that it would be inflationary at all. The Euro would rally if the crisis were resolved, and that would deflationary.
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« Reply #39 on: November 08, 2011, 12:27:11 am »
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But since Germany is the biggest economy and since its "currency" was the most undervalued by switching to the Euro you and me both know that inflation would be particularly bad in Germany and they don't even get to benefit from the ECB bond purchases.

But that's a secondary effect, not a direct effect. Just like, the Euro is devalued simply by Italy's membership inside of it, is a secondary effect. Plus we don't even know that it would be inflationary at all. The Euro would rally if the crisis were resolved, and that would deflationary.

I think the amounts that we are referring to here make the idea of it being deflationary pretty much impossible. These countries are in excess of 120% of debt to GDP. From my perspective they need to monetize that down to at least 70% or the higher borrowing costs are just going to each them to shreds anyway.

Printing 50% of GDP of a bunch of the Eurozone countries isn't going to be easy on them.
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« Reply #40 on: November 08, 2011, 12:32:22 am »
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I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.
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« Reply #41 on: November 08, 2011, 12:33:54 am »
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I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.

I don't want to get in a long discussion either. So I'll just say that increasing the money supply by lets say 30% is going to result in inflation.
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Gustaf
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« Reply #42 on: November 08, 2011, 10:22:37 am »
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I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.

You really think so? Printing the eurozone out of the crisis would basically be to say that the strategy to deal with this is precisely that. It means abandoning the ECB inflation target and predicate eurozone inflation on budget discipline in Southern Europe.

Unless, of course, it is coupled with some variety of fiscal union to ensure it doesn't happen again in the future. Wink

IMO, what it comes down to is that you simply cannot decouple authority over the budget with responsibility for paying the budget. Either Greece and other such countries must get the responsibility back by exiting the euro, or they must lose their authority via fiscal union. Otherwise there is no way of making the euro project credible.
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« Reply #43 on: November 08, 2011, 10:43:25 am »

I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.

Long term it is going to destroy the euro. Gustaf here is absolutely on the point. In fact, any European (not just Southern European) government that refuses to borrow to the hilt and then blackmail the ECB into printing more would be irresponsible to its own voters: the negatives of such an action would be spread all over the euro zone, while the positives would all be concentrated in the debt-issuing country. The outcome would be to make euro a weaker currency than drachma would be on its own. It's quite likely that euro members will have to borrow in Swiss franks, pounds or dollars. You really think Germany would want to stay in such a euro zone?

And, yes, the only alternatives are either political and fiscal integration (the latter is not possible without the former), or tough balanced budget amendments to euro countries constitutions. Both are pretty difficult and (especially the latter) not necessarily desirable.
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« Reply #44 on: November 08, 2011, 11:14:08 am »
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I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.

Long term it is going to destroy the euro. Gustaf here is absolutely on the point. In fact, any European (not just Southern European) government that refuses to borrow to the hilt and then blackmail the ECB into printing more would be irresponsible to its own voters: the negatives of such an action would be spread all over the euro zone, while the positives would all be concentrated in the debt-issuing country. The outcome would be to make euro a weaker currency than drachma would be on its own. It's quite likely that euro members will have to borrow in Swiss franks, pounds or dollars. You really think Germany would want to stay in such a euro zone?

And, yes, the only alternatives are either political and fiscal integration (the latter is not possible without the former), or tough balanced budget amendments to euro countries constitutions. Both are pretty difficult and (especially the latter) not necessarily desirable.

Yeah, balanced budget amendments strike me as quite dodgy. Having automatic stabilizers stepping in during times of crisis is a good thing, imo.

Also, we already have the SGP and that hasn't had any effect at all.

I'd agree that political integration is required for fiscal integration. That's the underlying problem of course - Germans simply don't want to pay for Greeks, because the latter aren't Germans. That is the essential problem of the EU. They're forcing something on the peoples of Europe which lacks fundamental resonance within those peoples.
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« Reply #45 on: November 08, 2011, 11:59:05 am »
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But what evidence is there that European governments would "borrow to the hilt" as you say, and then "blackmail the ECB"? You talk as if European governments were rabid animals without restraint or intellect. I give them more credit than that. Surely they would see that what you describe is a tragedy of the commons scenario and not do what you say.

I mean, is it not fair to say that during the first seven years of the euro, no European governments felt any fear of bond vigilantism? And during this time, they did indeed run up deficits. But not nearly so much as you say here. Further, the Euro during this time did not depreciate to a value 'less than the drachma' would be worth. It actually appreciated from about par to the dollar to well more than the dollar. And certainly this crisis has focused the minds of Europe's democracies on the problem of debt more than they had been before.
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« Reply #46 on: November 08, 2011, 12:18:02 pm »
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But what evidence is there that European governments would "borrow to the hilt" as you say, and then "blackmail the ECB"? You talk as if European governments were rabid animals without restraint or intellect. I give them more credit than that. Surely they would see that what you describe is a tragedy of the commons scenario and not do what you say.

I mean, is it not fair to say that during the first seven years of the euro, no European governments felt any fear of bond vigilantism? And during this time, they did indeed run up deficits. But not nearly so much as you say here. Further, the Euro during this time did not depreciate to a value 'less than the drachma' would be worth. It actually appreciated from about par to the dollar to well more than the dollar. And certainly this crisis has focused the minds of Europe's democracies on the problem of debt more than they had been before.

Is it just me Beet or did you change into a completely different person since like a week ago!

I mean prior to a week ago you were in agreement with us that the Euro had to break up, that bailouts and money printing wasn't going to work, didn't like ECB actions, etc.

All of sudden your defending the idea of the ECB printing by saying that you think it would actually come to a better result than now, a year ago, break up of the monetary union, defaults, and actually it if they just printed it would be all bunnies and rainbows.

What happened man? Did someone hack into your account or something and start acting as you?
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« Reply #47 on: November 08, 2011, 01:29:51 pm »
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No, I think you were misinterpreting me. I said breakup of the Euro with the northern countries leaving would be a good outcome. This discussion is obviously assuming that does not happen (there is no sign of it happening). I said default was inevitable given the curren path, and I still think so. But they could avoid it with an ECB guarantee backed by printing.

The key problem is the behavior of democracies and whether they can be trusted to maintain discipline within a multicountry currency union if the threat of default is taken away by the central bank. Perhaps there can be a compromise: In exchange for the ECB agreeing to buy as much Italian debt as necessary to end the crisis, Italy will agree to either a law or a Constitutional amendment (this would require a referendum) mandating some version of the SGP, replacing the 3% deficit limit with a balanced budget requirement across a business cycle; and the 60% debt limit to something closer to Italy's historical average in the past 20 years. Also as part of this law/amendment, it will supercede the annual budgeting process and implement automatic fiscal adjustments in the case the legislature is not able to comply. To break the rule, the legislature would have to take positive action. The ECB would naturally monitor the legislature and inform it if it were about to break its own domestic law or Constitution, and if it chose to do so would dump all of the country's bonds into the open market. In the face of such a structure I am confident that even a special-interest controlled, corrupt legislature would not "cross the Rubicon" and would maintain fiscal discipline.
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« Reply #48 on: November 08, 2011, 04:56:33 pm »
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But what evidence is there that European governments would "borrow to the hilt" as you say, and then "blackmail the ECB"? You talk as if European governments were rabid animals without restraint or intellect. I give them more credit than that. Surely they would see that what you describe is a tragedy of the commons scenario and not do what you say.

I mean, is it not fair to say that during the first seven years of the euro, no European governments felt any fear of bond vigilantism? And during this time, they did indeed run up deficits. But not nearly so much as you say here. Further, the Euro during this time did not depreciate to a value 'less than the drachma' would be worth. It actually appreciated from about par to the dollar to well more than the dollar. And certainly this crisis has focused the minds of Europe's democracies on the problem of debt more than they had been before.

I will gladly accept that position. Tongue
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« Reply #49 on: November 08, 2011, 07:52:36 pm »

But what evidence is there that European governments would "borrow to the hilt" as you say, and then "blackmail the ECB"? You talk as if European governments were rabid animals without restraint or intellect. I give them more credit than that. Surely they would see that what you describe is a tragedy of the commons scenario and not do what you say.

They'd see the tragedy of commons, but you will have taken from them the only mechanism out there to prevent falling into it. That mechanism right now is the merciless ECB, that won't budge no matter what and the implicit threat that the "misbehaving" country will be treated like Greece is treated now. Take those away without providing other mechanisms (i.e., political and fiscal integration) and you create the situation in which any "responsible" government would, in fact, be grossly irresponsible to its own voters - it would be letting the others to suck them dry.
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