The Great Debate UK
Having been bullied into swallowing European monetary union in 1998, the Germans are today being pressured on all sides into agreeing to one or more of a range of reforms – burden-sharing, Eurobonds, fiscal union, debt mutualisation, a banking union, joint deposit insurance – all of which amount to the same underlying reality: Germany foots the bill.
But beyond the economics of these different proposals, there are more important concerns. If a political explosion is to be avoided, Germany must extricate itself from the mess as quickly and cheaply as possible, recapitalising the country’s own banking system and selling euro zone exit to its voters as a loss-cutting exercise: sunk-costs, a salutary lesson.
Many members of my own profession, who should know better (e.g. Howard Davies on this morning’s Today programme on Radio 4) argue that Germany derives enormous export benefits from having a fixed exchange rate with its neighbours. Not only are these short term benefits grossly exaggerated in the current situation where Germany finds itself selling goods to its neighbours in return for worthless IOU’s, and the future situation where Germany has to lend money to the other euro zone members so that they can buy its exports, but the point that Howard Davies and co are ignoring is at some point going to be obvious to Germans: they are being taken for a ride in the euro zone.
It is deeply embarrassing to listen to our Prime Minister lecturing the Germans about the need to solve the euro zone problem – only a few months ago, President Sarkozy told him in no uncertain terms to mind his own business, and the German Chancellor no doubt feels even more entitled to do the same. If Frau Merkel buckles under the pressure from irresponsible and short-sighted people like our own PM, there is a danger that Germans will at some point in the future wake up to find themselves in the same predicament as their grandfathers after World War I – saddled with crippling payments to foreigners, which they will feel are totally unjustified, and for which they feel no real responsibility.
So we’ve got the fresh Greek elections we expected and markets, despite the inevitability that we would get here, have reacted with some alarm. European stocks have shed around 1 percent, and the harbour of German Bunds is pushing their futures price up in early trade. The Greeks will try to form a caretaker government today to see them through to elections expected on June 17.
The key question is whether the mainstream parties can mount a convincing campaign second time around, playing on the glaring contradiction in SYRIZA’s position (no to bailout, yes to the euro) and essentially turning the vote into a referendum on euro membership, which the overwhelming majority of Greeks still support. Don’t count on that. SYRIZA remains ahead in the polls.
To be able to pull it off, PASOK and New Democracy will need some help from Europe. There have already been hints from Brussels that if a pro-bailout government is formed, Athens could be given some leeway on its debt-cutting terms. But equally other voices are saying there is no more room for manoeuvre.