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.