Pete_London
Inactive User
From the start, monetary union was a political conceit for which many Europeans are about to pay a devastating economic cost.
It’s not just the markets that have lost faith in the euro; previously compliant electorates are also close to breaking point
It might have been a statement of the blindingly obvious, but Mario Draghi’s warning yesterday that the eurozone as it stands is unsustainable, and that Europe’s leaders must clarify their vision for the euro quickly if the single currency is to survive, was no less startling for it.
Every man and his dog have been saying the same thing for the past two years now, and some since long before, yet so far it’s not made a bit of difference. Now that the president of the European Central Bank, no less, has also hit the panic button, will policymakers finally sit up and listen?
Don’t hold your breath. As the ever worsening banking crisis in Spain demonstrates, it may be too late. It’s not just the markets that have lost faith in the euro; previously compliant electorates are also close to breaking point. The die may already have been cast.
No one can tell you exactly how the euro will end, though many, including yours truly, have tried. What we do know is that if there are answers, they lie in German hands. It won’t be Spain, Italy or even France, still less tiny little Greece and Ireland, who ultimately determine the single currency’s fate, but central Europe’s beating economic and political heartlands.
At the Camp David summit last month, Angela Merkel, the German Chancellor, was left in no doubt about the weight of responsibility that rested on her shoulders. If the euro fails, she was told by those present, it will be Germany’s fault. For the third time in a century, that nation stands accused of blowing up Europe. To stop this catastrophe in the making, Germany must give up on incremental shilly-shallying and act boldly now.
Actually, the parallel with the two great wars is a ridiculous one, as there is plainly a world of a difference between the acts of aggression that sparked the mass slaughters of the last century, and refusing to support with taxpayer euros a political and economic endeavour that was flawed from the start.
The German position is, in many respects, understandable and correct. To be panicked into a federal Europe for which there is virtually no popular support is not obviously a sustainable solution, never mind the open-ended liability it would impose on German taxpayers. Much of the European periphery, where restrictive labour laws and other semi-corrupt practices are still rife, in any case desperately needs the structural reform Germany insists on. And though it is true that austerity is proving counter-productive, what do its opponents suggest? That Spain and Ireland build even more houses, redundant regional airports, motorways, and spanking new municipal facilities? This was the kind of stuff that got the banking system into trouble in the first place. Just how much more construction can a country sensibly take?
There are, of course, still ways in which the European authorities could douse the flames without going the whole hog of political union. One of the problems with the single currency, as Paul De Grauwe of the London School of Economics has pointed out, is that much of the infrastructure needed to sustain it is missing. He puts it like this: Europeans built a town without a fire brigade, in effect, because they convinced themselves that the fire code they were establishing was so brilliant it would prevent there ever being a fire. Establishing a full-blown federal banking system, with a single regulator, resolution regime and bail-out mechanism, would have largely prevented the kind of blaze going on in Spain, where mass capital flight into zero-return German bonds is threatening complete financial and economic collapse.
Too late, the European Commission has put use of European bailout money for direct recapitalisation of national banks back on the table, but it’s going to take years before anything happens. By the time it does, Spain will have sunk beneath the waves. As it is, the Spanish government is reduced to the logical absurdity of asking domestic banks to lend it the money with which to bail them out.
Again too late, Mrs Merkel has indicated that she might be open to the idea of a “European Redemption Pact”, a kind of Eurobond lite, which has some of the attributes of a fully fledged Eurobond but is sufficiently capped to satisfy German objections. Even if eventually agreed, however, that notion is still years away from providing an effective form of debt relief. Or maybe the European Central Bank can be persuaded to forget legal constraints, and monetise sovereign debt without limit? Again, Germany says no, because rightly, only elected politicians can agree such massive monetary transfers.
Concern about sovereignty is making establishment of the necessary fire brigade a virtually impossible challenge. You’d think, given the seriousness of the situation and the now very real prospect of calamitous break-up, that it would concentrate minds into making the necessary compromises. Yet, with record low unemployment and a still growing economy, Germany has adopted an “I’m all right, Jack, not our problem” attitude. Its focus is on enacting the austerity of the fiscal compact, which – oddly, given the evidence to date – it still thinks will eventually work.
This seems deeply unlikely. Nor would the intolerable scourge of seemingly permanent depression in the south be addressed by any of the technical remedies listed above. They might make the euro function a bit better, but they wouldn’t correct lost competitiveness and crushing joblessness in the Mediterranean states.
If Germany doesn’t have answers, that’s perhaps because there are none. From the start, monetary union was a political conceit for which many Europeans are about to pay a devastating economic cost.
Source:The euro is going up in smoke - and there's no fire brigade to stop it - Telegraph
Looks like Nigel farage was right about the bank run in spain
Last edited:
