Germany's PIIGS Role: Q&A With Gary Becker

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- The eurozone is currently in a great deal of economic trouble. The Southern European countries, collectively known as PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are having tremendous problems with their fiscal solvency. Even France is teetering at the brink of insolvency. Germany is left as the strongest economy in the eurozone and the country to which all are turning to set European fiscal policy. We interview Gary Becker, Nobel Prize-winning economist at the University of Chicago, to understand some of the political and economic implications of the European financial crisis.
Gary Becker, Nobel Prize-winning economist at the University of Chicago.

Q1: What is your opinion on the loans made by German banks to the banks and governments of the so-called PIIGS nations? Some of the evidence suggests that these loans will be impossible to pay off. Wouldn't it be irrational for competent financial players to make such loans?

A1: The weaker countries, economically speaking, might have anticipated that the stronger economies of the eurozone -- Germany and France -- would come to the rescue of their fellow EU members. That would provide economic protection, to some degree, for the weaker economies of PIIGS.

However, the countries that originally made the loans and that are being called on to make the bailouts, Germany in particular, did act in a surprising way since they do seem to be losing a great deal of money. When engaged in financial enterprise, losing money is generally not the goal, and so engaging in a practice that would almost seem to guarantee losing money does seem to be highly irrational.

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Q2: That brings us to a broader question about your theory of behavioral economics. When faced with irrational behavior from otherwise intelligent economic players, it begs the question: what is the proper approach?

A2: In such a case, I would advocate trying to find some underlying rationale behind the behavior that is seemingly irrational that would render the course of action engaged in by the player in question understandable and coherent. In this case, perhaps there might be some objective other than having loans paid off that was driving German lending practices.

Q3: At the macro level, Germany has unprecedented political power. Do you believe that German leaders foresaw this attainment of fiscal and therefore, political leadership of Europe? Was this part of Germany's strategy?

A3: Certainly the Germans were concerned at the ratification of the EU common currency whether they would be able to control the weaker European countries. German leaders may well have anticipated that the common currency of the eurozone would ultimately lead to greater power for Germany both politically and economically. In fact, some other countries like Great Britain may have refused to join the eurozone because they would not want to be in a monetary union in which Germany had dominant power. A desire for greater power in Europe is likely to have gone into the German decision to join the eurozone. Germany is the most powerful player in the union with France as a secondary power. A weaker country like Italy may have thought that conditions required by the eurozone have the benefit of more likely assistance from stronger countries in the event of a crisis.

Q4: Can the PIIGS avoid being slaughtered? If so, how will the process evolve? It is doubtful that Germany alone can bail them out, despite Germany's political hegemony.

A4: The major issue confronting the EU is what happens next. There may be a sustained prolonged recession in Southern European countries. There will be a greater call for fiscal centralization, which will be led by Germany, leaving Germany in an even more secure position as the leader of Europe. There is no doubt that fiscal centralization will lead to far more power for a country like Germany. Their main concern will be that economic policies are not dictated by the other countries of Europe. Germany has a very conservative fiscal and budgetary policy. They will agree to centralization only if they think that they can dictate joint EU policy. They will be an excellent position to do just that due to their fiscal superiority within the eurozone.

Q5: Do you see an interesting investment opportunity in light of the European Financial Crisis?

A5: There are lots of great opportunities to invest in Eastern Europe but investing in the southern countries is likely to be unattractive for several years, if, as I expect, those countries suffer from a prolonged economic downturn.

Nathana O'Brien, a Phi Beta Kappa graduate of the University of Chicago who will attend Yale Law School next year, contributed to this article.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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