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JUNE 9, 2012 2:07PM

Why Euro-Failure Isn't in Germany's Interest: Variance

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If one was an options trader, it is true that the return on an option increases with the variance of the underlying, if of course one has solvent parties on the other side of the instrument, which might well not be the case in the event of a total Euro meltdown.

It would be extremely unlikely to be in Germany's interest, which one can see from the origins of the Euro in the "Snake" that was created in the ake of the monetary, financial, and pricing disturbances in the wake of the end of Bretton Woods.

Since Germany in the end is central to the American position in Europe, that also wouldn't be in American interest either.

Given the massive increased variance in the event of Euro-failure, it isn't really in anyone's interest to have that occur in fact, if that doesn't mean that it won't happen, since then there is the question of how to prevent that, and especially at who's expense.

Collective benefits fail to be provided all the time because of the issues involved in organizing their provision, something best discussed in the classic work The Logic of Collective Action by Mancur Olson, the single best scientific study of how and why human beings cooperate, and when they don't, and which has the key prediction here on the Euro, if a common-sensical one: Germany is the whole key.

The reason is that one generally speaking has to provide "selective incentives" for cooperation, or people "free ride" on the provision of the benefit, unless however there exists a Party that has the incentive and ability to provide enough of the collective benefit itself, in this case Germany.

Although Germany can't provide all the stabilization needed, nor should it as that isn't politically feasible due to the normal human resentments raised by "free riding" in numerous contexts, again best pointed out in Olson, especially if a Eurobond issue was guaranteed by Germany as the last integration project on the basis of national security expenditures of European Union members, national security being as Adam Smith said the first function of government everywhere, it would have the scale and depth needed in financial markets to dampen speculation about individual members leaving the Eurozone in the way that is currently harmful as to contagion effect and in a political context that is feasible in the short and long run.



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