A train crash in slow motion
The euro crisis rolls on like a train crash in slow motion.
The fact is, you cannot bend economics to your will. The forces which say you cannot do this are almost as immutable as the laws of gravity. Yet that is what the founding fathers of the euro set out to do.
They sought to bind nations with wildly disparate national traits, and equally disparate levels of competitiveness, into one whole. But they did it for political reasons not economic.
It might have worked if all involved had applied the original, sensible rules of entry and submitted their annual budgets to a Brussels power of veto, but they did not.
A monetary union not backed by a fiscal one is actually a no brainer. It cannot work. Even those American founding fathers of nearly 250 years ago understood this.
The success of the American union had a lot to do with the template drawn from a single gene pool with a single historical experience, put in place by the original thirteen colonies who decreed a single language for all.
Now ‘cruel necessity’ – as Cromwell is said to have described the decision to cut off the king’s head – is pushing Europe to cut off the head of the errant Greek state and force it back to the Drachma, Europe’s oldest currency. It is also going to force those who remain within the single currency to give up forever sole control of their countries’ spending policies.
Having done that, then you might at last have a system which actually worked. Within that system would undoubtedly develop a super strong currency with the potential to displace the dollar as the world’s reserve currency.
It all hangs on what the Greeks vote for at the forthcoming election. Despite all the serious pain they are going through a surprising number of them (over 70%) still want to stay in the euro. But, being the hot-headed Greeks that they are, they cannot help but wear their pain on their sleeves.
If this shows itself by a massive protest vote for the party which promises to bucket a lot of austerity promises – as seems likely – then Greece’s days as a euro member are numbered.
The young and inexperienced party leader in question has convinced himself that the Germans, right now, need Greece more than the Greeks need the Germans. The logic of his argument is that the loss of Greece will begin the unravelling of the euro and quite possibly the whole ‘European Project’. He will simply refuse to implement austerity and defy the Germans and north Europeans to do their worst. He’s convinced they will blink first. I fear he and his nation are in for a terrible shock.
It has to be said that no one has benefited more from the euro than the Germans.
If they have huge reserves of savings that is because for a decade they have been marketing their products in a hugely (for them) undervalued currency. Their former chancellor, Helmut Kohl, has admitted – albeit belatedly – that at the time the political elite dared not ask the German people if they would surrender their beloved deutschmark in favour of the new currency because they knew that they would get a big fat nein.
Yet if the euro were to break up, their deutschmark would be back again – only this time with a vengeance; it would become so expensive that few could afford to buy their products. Exports would plummet.
So yes, the Germans are terrified that a Greek exit will set off an unstoppable chain reaction causing the weaker southern economies to drop out, threatening to destroy the whole single currency. But the Germans are equally terrified at seeing their hard earned savings and pensions going down a bottomless ‘Club Med’ plughole and an endless future of propping up lame duck economies.
So now the previously unthinkable is being touted in Berlin and the other chancelleries of Europe: Greece can go if it will not comply with its undertakings. It will serve as a salutary lesson to other possible backsliders, say some. Provided they do not show similar defiance as Greece, then I believe that Fritz will give the European Central Bank the powers it needs to act as the lender of last resort like the American Federal Reserve or the Bank of England.
Both for narrow self-interest and deep psychological reasons Germany does not wish the European Project to fail, much less be blamed for its failure. It wants desperately to be seen as a good European and lay forever the ghosts of its troubled past. So my own belief is that Germany will do all in it power to hold the eurozone together.
IIf the markets go on to attack the other weaker economies once Greece has gone, who knows where it will all end. Even German savings may not be enough to save the euro, so big are the debts of Italy and Spain, the 7th and 9th largest economies in the world.
George Soros, the man who bet against Britain staying in the ERM in 1992 and won a billion pounds in the process, says the euro train has three months before it hits the buffers. While he is not always right, we should worry. He is 60% of the time.
It is my firm belief, however, that the euro, in one form or another, will survive. And as strange – even weird – as it may seem, given present circumstances, there are still many countries waiting in the wings to join such as Poland, the Baltic states, Czech, Slovakia, Slovenia and even perhaps Sweden and Denmark.
Had the original rules of entry been adhered to then none of the present PIIGS would have qualified to join in the first place and this nightmare would never have happened. For that, Germany must take its share of the blame; it does no good for it to get on its high horse over-much.
But a reformed euro, even if it has shed a whole swath of weaker members, may yet be something to behold. It’s been a long time in Europe since anyone has been able to boast of sound money. If it did not entail so great a loss of sovereignty, it might be a door that we ourselves might one day find ourselves greatly tempted to knock on.
For a brief moment we thought we had got on top of the financial woes of the Credit Crunch and our personal and governmental debts which put all our livelihoods at risk.
At incredible potential cost, we had recapitalised our banks and put them on a sound footing. And then we began the painful long haul task of bringing our deficit under firm control. So far so good; the markets were impressed. The heat was off Britain.
But then the markets turned their gaze on the warring Europeans and their troubled, ill conceived euro.
The sovereign debt levels of the periphery countries quite spooked them. A slanging match had developed between the thrifty north and the spendthrift south. The Germans, in particular, were furious at the feckless and economically illiterate way the south Europeans had behaved, and the talk was that they had had enough of the haemorrhaging of their hard earned dosh. The whole future of the euro – and with it the European Union – hung in the balance.
Greece was the domino likely to go down first and very likely to carry a string of others with them. It was never an easy country to govern, and lovely people though they are, one of their irredeemable failings is that they make almost a national sport of not paying their taxes.
Yet at the same time, because they were part of the wonderful European Union, they expected to enjoy all the social benefits of the conscientious taxpaying north. How do you square a circle like that? After all, the north only got all those benefits because it was willing to cough up.
Greece’s public sector is bloated to the extent that it makes our own flawed product look like a sleekly toned race horse. What’s more, it only turns up for work when it feels like it and its appalling levels of absenteeism pass with just the Greek equivalent of a Gallic shrug. Then, after a semi-detached life of half work they insist on retiring ten years before the rest of us. No wonder the boys in their lederhosen are hacked off.
Yet despite what he and his other diligent north European comrades feel, he will not get his pride and joy deutschmark back. The ruling elite will see to that! The political classes have invested too much political and other capital in the so called ‘European project’ to let it founder. But after terrible dithering and lack of leadership which has propelled them to the wire, they have drawn back from what they see as the abyss of a collapsed Europe.
They are now determined, at last, to get ahead of the curve. They are putting together a package of such breathtaking proportions – three trillion (or 3,000,000,000,000) euros, no less – that even the money markets will recognise that they are putting their money where their mouth is and back off.
Yet the package will need approval of all 17 members of the eurozone and all 27 members of the Union for treaty amendments. Part of the deal, I’m sure, is that the people who underwrite the deal – principally the Germans – will insist on a future level of fiscal rectitude which will make it nigh on impossible for such a situation to arise again. There will be an oversight of all 17 member states’ budgets with a majority power of veto.
It will be, effectively, the final part of the jigsaw towards a united Europe: for all intents and purposes a fiscal union, which along with the existing monitory union will finally give the European single currency credibility. Politically, it couldn’t have happened at the beginning or at any point along the way, but dire necessity has forced the issue. It’s an ill wind that blows no good. The new Europe will not be such a bad place to belong so long as all that nonsense of an interfering Brussels is dealt with.
This is a heaven sent opportunity which will not come again. And because they need our signature on the treaty, we can insist on repatriation of those matters we all know to be flawed, such as the Working Times Directive, border controls, fisheries protection, and even that horney old chestnut: the Common Agricultural Policy.
Way back when we were haggling over the Maarstricht Treaty, they came up with that amazing word “subsidiarity”. What ever happened to it? It was adopted by the Union and was specifically designed to constrain Brussels.
If we seize the moment, we can then settle down to becoming the good Europeans we were always willing to be, instead of the perpetual awkward squad.
The world of tomorrow is going to be one of the big battalions, and Europe is a very big battalion indeed; one more than capable of stopping itself being pushed around by a resurgent China or anyone else.