The Austrian Business Cycle Theory (ABCT), developed largely by Ludwig von Mises and F. A. Hayek, predicted the present crisis and explained its causes in advance. Many commentators aware of this theory warned that after the real estate bubble went bust, a new one would form in the sovereign debt markets. Expanding fiscal budgets in a recessionary environment would ultimately lead to a situation in which highly indebted governments needed a bailout. For Greece and the other PIIGS (Portugal, Ireland, Italy, Greece and Spain), that burden now largely falls on their friends and allies within the European Union.
Chancellor Angela Merkel has tried to calm things down. Recently portrayed by the media as la Madame Non, she hesitated to confirm German aid, but eventually gave in. And this is despite the fact that such financial aid appears to constitute a breach of European Law (§125 of the Treaty on the functioning of the European Union clearly states that the Union shall not be liable for or assume the commitments of central governments of any member state). A group of respected economists and lawyers are therefore questioning the legitimacy of bailouts in the highest German court, the Bundesverfassungsgericht. The same individuals fought but lost their case against the introduction of the euro in 1998. This time, however, they insist on their position, for otherwise the bailout might turn the “European Union into an inflationary union.”
Indeed, giving financial aid to Greece and the other PIIGS means not only breaking the very principles on which the eurozone was once founded; it also means opening a Pandora’s Box. German President Horst Köhler (who now seems to be supporting the bailout) warned about this in the 1990s, when he was still a government secretary in the German ministry of finance. His words back then were rather clear: in order to assuage the fears of German taxpayers he told Der Spiegel that each member state will deal with its own deficits and that there will be no aid obligations for the European Community. He went on to assert that “it won’t happen that the South cashes in on the so-called rich countries, as then Europe would fall apart.”