Sunday, January 31, 2010

Will Germany Leave the Euro?

and leave the Club Med to sort out the mess?

Telegraph's Ambrose Evans-Pritchard speculates on what Germany may do, which by the way is what Jim Willie, aka Golden Jackass, has been saying in his writings for some time: Germany and its satellite states to leave the current Euro system and resurrect the powerful German Mark.

Should Germany bail out Club Med or leave the Euro altogether? (Ambrose Evans-Pritchard, 1/31/2010 Telegraph UK)

"Germany faces a terrible dilemma. Either Europe's paymaster agrees to underwrite a Greek bail-out and drops its vehement opposition to a de facto EU economic government, treasury, and debt union, or the euro will start to unravel, and with it Germany's strategic investment in the post-war order.

"The spike in yields on 10-year Greek bonds to 400 basis points above German Bunds has been shockingly swift – a warning to Britain, too, that markets can suddenly strike any country that takes creditors for granted.

"We can argue over whether Greece, Portugal, or Spain are at risk of being forced out of the euro. But there is another nagging question: whether events will cause Germany and its satellites to withdraw, bequeathing the legal carcass of EMU to the Club Med bloc.

"This is the only break-up scenario that makes much sense. A German exit would allow Club Med to uphold contracts in euros and devalue with least havoc to internal debt markets. The German bloc would enjoy a windfall gain. The D-Mark II would be stronger. Borrowing costs would fall. The North-South gap in competitiveness could be bridged with less disruption for both sides.

"To be sure, Germany is happily placed in the current EMU system. By compressing wages for a decade it has stolen a march on EMU. Critics unfairly call this a beggar-thy-neighbour policy. It is simply the way Lutheran society operates, in deep contrast to the way Latin society operates – a cultural clash that should have given pause for thought before Europe's elites launched headlong into their adventure. " [Emphasis is mine.]

Not all countries are equal, after all, and there is such a thing as cultural difference. (Duh.)

The EMU, or European Monetary Union, is one big moral hazard where fiscally prudent countries in the north end up subsidizing the profligate spenders of the south. The architects of the EMU (and of EU) believed they could force a pan-European suprastate in which countries like Germany and the Club Med (Spain, Portugal, Italy, Greece) share a common currency, common monetary policy, and eventually common fiscal policy, because they are all "Europeans".

For the sake of European unity, monetary and political, they would expect the wealth transfer from Germans to the Club Med, much like Germans did to East Germany. But Germans are balking:

""Politically," said Bundesbank chief Axel Weber, "it's not possible to tell voters that they are bailing out another country so that it can avoid painful austerity measures that they themselves have gone through. Such aid, whether conditional, or – even worse – unconditional, is counterproductive."

"Dr Weber is right on both counts. Fresh loans for Greece can achieve nothing useful at this stage. Greece already has a public debt hurtling towards 138pc of GDP by 2012 (Standard & Poor's). It is already in a debt compound spiral. The EU elites have yet to acknowledge that Greece and much of Club Med need gifts – not loans – akin to transfers paid to East Germany after unification, or North Italian perma-subsidies to the Mezzogiorno. "

The article concludes with these sentences:

"EMU architects were warned in the early 1990s that monetary union would prove unworkable as constructed. They scoffed, sure that any crisis could be exploited to force the pace of economic union. Commission chief Romano Prodi later admitted as much. "The euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible now. But some day there will be a crisis and new instruments will be created."

"We will soon learn if this gamble will pay off, or prove catastrophically wrong."

A cynic in me is musing: Was the Euro designed to be "unworkable" from the beginning, in order to cause a crisis down the line that would force further economic (and political) union?


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