The euro zone marriage is over

October 10, 2011

By Laurence Copeland. The opinions expressed are his own.

Under the Arc de Triomphe, tourists can gaze up at the engraved list of Napoleon’s great victories: Austerlitz, Jena, Wagram… Perhaps a similar triumphal arch should be built in Brussels to commemorate the string of victories won by a tiny band of heroic Eurocrats over the mass of their combined electorates: Rome, Maastricht, Lisbon, Wroclaw, and now Berlin, where, to nobody’s surprise, the integrationists in the Bundestag have easily seen off the opposition to their plan to bolster the EFSF. Cue the now-familiar backslapping in Europe after each of their knife-edge victories over the forces of democracy.

The starting point for these Eurocrats/integrationists is that the popular will is simply an obstacle on the road to the ultimate destination of a United States of Europe. Whenever they encounter one of these inconvenient roadblocks, they fume, argue among themselves about the merits of alternative routes until they finally swerve triumphantly round the obstacle, congratulating each other for their ingenuity and skill.

The trouble is that this game gets more dangerous at each stage. In the present case, it is reported that three out of four German voters is opposed to supporting Greece and co., and they’ve not even started paying for it yet. Moreover, it is not as though the largesse is going to create a reservoir of gratitude alongside the Mediterranean – far from it. Judging by reactions in Greece, the outcome will be a legacy of bitterness for decades to come.

It is important to realise that arguments about the cost of saving the euro zone are ultimately sterile, because under current conditions there is no limit to the commitment that the Germans are being asked to make – a point which is not lost on people in Germany. The €440bn additional funding for the EFSF sanctioned by the Bundestag is simply a first instalment, sufficient to cover the cost of propping up the bond markets on the assumption that it will prevent contagion from the Greek imbroglio – which, of course, there already is aplenty. It is several months too late to stop the panic spreading beyond the original porcine four – Portugal, Ireland, Greece and Spain – to engulf Italy and even to some extent France. Back-of-the-envelope calculations (which is as much as it is worth doing) suggest that the amount needed could be of the order of €2 trillion or more, equivalent to about 80 percent of Germany’s national income.

This may seem an enormous sum of money, but it is merely the downpayment on a potentially unending stream of subsidies in the nightmare transfer union scenario, as the Greeks slide back into their old, profligate ways, the Spanish continue to resist labour market reform, and the Italians replace the Berlusconi government with an administration stuffed with ageing ex-Communists.

How long will the Germans carry on financing this orgy? Like a bishop at a Berlusconi bunga-bunga party, they will either explode in a destructive rage or find the temptation to join in irresistible.

What’s to be done? How can this outcome be avoided?

As many commentators have pointed out, Europe’s politicians have consistently been behind the curve in their response to events, perpetually coming up with solutions to last month’s problem, only to find that the dynamic of the crisis has already moved on to ever more threatening territory.

It is time to look ahead to a stage beyond the present predicament.

My starting point is the need to ditch the notion that everything must be done to preserve the euro zone. On the contrary, the marriage is over. We may as well recognize the reality and start preparing for an orderly divorce – in fact, I would guess contingency planning has long been under way in the corridors of power in the European capitals. As this week’s Italian downgrade shows, Greece is now only a sideshow. Its fate is really no longer of any importance to non-Greeks – whether it ultimately inflicts a haircut of 40 percent or 70 percent or even 100 percent on its creditors makes a difference of a few billion euros here or there to the banks who have provided the loans. In the cases of Spain and Italy, we are talking of trillions, not billions of euros.

The only sensible way out for the North Europeans – Germany, Netherlands, Finland and possibly Austria – is to relaunch the deutsche mark for their own borrowing and lending. The currency would inherit near-instant reserve currency status, with the seignorage probably being more than enough to reimburse the German corporate sector for the losses on its (much devalued) euro-denominated assets and to cushion the blow to its competitiveness arising out of the strength of the new currency.

This solution certainly carries risks – but then so does the status quo. It would involve tremendous dislocation, with consequences which are not entirely foreseeable – but the same goes for persisting with the present situation. The difference is that it is hard to imagine any politically stable solution to the problems of the euro zone as it stands, whereas a breakup at least holds out the hope of some kind of stability in the future.

Notice that there is no reason whatever why the end of the euro zone should necessarily mean the end of the single market – the linkage is pure scaremongering, aimed simply at justifying the integrationist agenda.  Britain, for example, has always been in the single market but not in the euro zone. Of course, in a post breakup scenario, the Southern Europeans would probably import less from Germany (and from everywhere else, including UK) if they had only devalued euros to offer -  but they will buy far less in the next few years anyway, given their current predicament. A devalued euro may ultimately allow them to recover more rapidly than if they remain chained to a relatively strong currency anchored in Northern Europe. In short, a breakup is desirable for all concerned.

Ultimately, the only certain losers from a breakup will be the European power elite, those who have driven the “European Project” relentlessly forward to the edge of the abyss where it now stands. Far from surrendering, I expect even now they are gathering their forces for one last push.

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