Euro's Weakest Members Will Destroy It

Jeremy Warner Daily Telegraph February 13, 2010

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By Jeremy Warner Published: 6:52PM GMT 12 Feb 2010

Comments 19 | Comment on this article

The euro will stumble between crises unless changes are taken Photo: Getty Images

Europe's political leaders are barking up the wrong tree in thinking the immediate solution to the continent's manifest fiscal problems lies within the eurozone. When reason takes second place to pride, the result is always bad and self-destructive policy. The loss of face feared by the eurozone if others are brought in to sort out the mess threatens just such an outcome.

The sooner it is recognised that the initial sticking plaster should be applied not by Germany and France, but by the global economy's traditional lender of last resort, the International Monetary Fund, the better it will be for all.

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That's not to say that the IMF can provide long-term remedies for the euro's deeper fault lines and contradictions. It cannot. These are intractable problems that will require Herculean reform within the eurozone.

As it is, the problem requires rather more than the vague statements of support we have seen thus far from European leaders. Their approach is eerily reminiscent of the initial stages of the banking crisis, when governments attempted to halt the rout by promising to stand behind deposits. This should, in theory, have made everyone feel safe about their money without having to put taxpayers' cash on the table. Predictably, the confidence trick failed, if only because it did nothing to answer well-founded concerns about the underlying solvency of the banks. The same is true of Greece, and perhaps others, too. The country is as broke as a busted flush and needs direct support in servicing its debts.

The reason this would best be provided by the IMF has little to do with the fact that it is technically illegal, under the Maastricht Treaty's no bail-out clause, for EU members to do so themselves. The legislation that underpins the euro has already been tested to destruction, and as it stands is now largely irrelevant.

Rather, it i

By Jeremy Warner Published: 6:52PM GMT 12 Feb 2010

Comments 19 | Comment on this article

Rather, it is because of the geo-politics of the eurozone. At a time of growing austerity, German taxpayers will deeply resent any hint of their money being used to rescue the profligate Greeks. The anger felt by German voters will be matched by Greek resentment of the vice-like austerity Germany would impose.

A level of pain is being demanded of the Greeks that Germany would never dare inflict on its own citizens, and indeed would regard as economically harmful. It wouldn't take much to revive memories of the devastating famine under Germany's wartime occupation of Greece. Austerity imposed through fiscal and monetary subjugation would risk the very opposite of what the euro is meant to achieve: international friction would fast replace economic co-operation and harmony.

Germany has always been sensitive to the charge that the euro is little more than a form of economic imperialism, and it is, in any case, not at all happy with its presumed responsibility as the eurozone's powerhouse to bail out the dominions.

That wasn't meant to be the deal at all, even if it might be in Germany's interest to do so; the consequences for German banks and the wider economy of a Greek default would be profound, by some estimates at least as bad as the collapse of Lehman Brothers.

The IMF, which has decades of experience in this kind of thing and is entirely comfortable with its role as the economic bullyboy of the world stage, is likely to make a better and more impartial job of it. Already, it is to be brought in to monitor Greek compliance with its fiscal bed of nails.

Besides, Greece is only an outrider for fiscal problems which, to varying degrees, have engulfed virtually all advanced economies. The problem is not specific to the Club Med nations of the Eurozone.

Yet the IMF can be of no help when it comes to the longer-term challenges facing the single currency. When Greece and other under-developed European economies cheated their way into the euro, they bought themselves the luxury of low German interest rates, which in turn produced a construction, housing and credit boom. As the German economy grew more competitive, these smaller economies became less so, opening up a progressively larger trade gap between the surplus euro core and the deficit fringes that could not be corrected through devaluation.

The obvious remedy is for Germany to do more to stimulate domestic demand and, counter-intuitively, become less competitive. Judging by yesterday's GDP figures, which showed nil growth in the fourth quarter, it may have to, for its exports are plainly not going to get any further support from the Club Med countries, all now condemned to a beggar-my-neighbour, deflationary race to the bottom of output and living standards.

The euro area also needs urgently to establish central treasury functions and more mobile labour markets, the mechanisms by which the United States maintains a single currency. But as things stand, Germany demonstrates little appetite for any of these things.

The euro will almost certainly survive the present crisis. There is too much political capital vested in the project for it to fall at the first fence. Yet until these issues are addressed, it will stumble from one crisis to the next.

Comments: 19

BD Mathers Spot on! A single currency across a wide range of societies was destined to pull the strong down with the weak. Stupid idea in the fist place. It was ever thus.... look at the Roman Empire stretched on too many fronts..... Too much interdependance within our European collaborative is unhealthy for everyone.

Who will end the Euro? Will Germany walk away, going back to solidity of the Mark, or will France capitulate? The most likely scenario is that the EU will fudge Greeces debt and try to absorb it. To detatch from the Euro now would cost the EU top table billions and the possible chaotic collapse of the new Eastern Bloc members straight back into Communism or worse... Remember this is a political not financial union. That is why the US + China will always outperform the EU bloc in the long term

I'm with the Huntsman. I loathe everything about the undemocratic European Union and the Euro - false money based on false economics. so our dear Leaders will lose face when the whole damn edifice collapses and to quote Rhett Butler in "Gone With the Wind - "my dear, I don't give a damn!"

Anthony Hollis on February 13, 2010 at 08:23 AM (from the now censored column about Brown failing the UK) Unfortunately your argument is flawed in two respects.. Firstly, any export that goes overseas is often routed via Rotterdam before going onwards to other countries outside the EU. However, it is still classed as an EU export thereby creating a false impression of EU trade. The real figure is more like 10% .... which is why this is done of course. Secondly, as you saw with Traitor Brown over the EU, its easy enough to ignore the wishes of the people and just sign up to the Euro at any time to assist in propping up the 1960s socialist failure called the EU. It is long past its sell by date.

Almost a decade ago, in the closing years of my career teaching A Level Economics, I discussed the Single Currency with my two teaching groups and, in particular, the much debated convergence criteria. As things so often happen, one group had a Greek student on a year's visit to improve his English, a bright, eager individual. As we discussed the convergence criteria we applied them to each of the would-be members and, of course, included Greece in our assessment of how each state would fare. Greece did not score well, much to the understandable annoyance of our Greek friend. In particular when the matter of the size of National Debt arose and I revealed that this should not excedd 50% of a country's GDP, Greece's stood then at around 150%. As we now know that particular test and others were quickly glossed over in return for some pie-in-the-sky declaration of future good intentions. That, I am afraid, is just one of the reasons Greece, and others are in deep trouble. The other, almost overwhelming reason is the lack of an EU economic and political regime, a system like the USA possesses which makes that single currency, the US dollar, work in 50 disparate states. At the time my class agreed that such a development was highly unlikely, perhaps impossible and the single currency was doomed before it got underway. As for my Greek student, he returned to Athens at the end of that academic year to read Economics at Athens University. I often wonder how he is doing.

Anthony Hollis on February 13, 2010 at 08:23 AM Unfortunately your argument is flawed in two respects.. Firstly, any export that goes overseas is often routed via Rotterdam before going onwards to other countries outside the EU. However, it is still classed as an EU export thereby creating a false impression of EU trade. The real figure is more like 10% .... which is why this is done of course. Secondly, as you saw with Traitor Brown over the EU, its easy enough to ignore the wishes of the people and just sign up to the Euro at any time to assist in propping up the 1960s socialist failure called the EU. It is long past its sell by date.

The euro is a house of straw, or rather one built atop pillars of unequal strength - given that states which subscribe to the shared currency are of very unequal economic strength. It is a device by which nation states are to be destroyed - for unless and until Germany and Greece (and all the other weaker states) are mere provinces within an entity perceived as unified citizens who are funding what amounts to wealth redistribution will rightly be able to rail at what is happening. Irresponsibility has been rewarded, prudence punished - all on an altar the political class intends to sacrifice statehood upon - for the one thing thriving within the EU structure is an unaccountable multilayered paid set of politicians and bureaucrats.

I would hate to join the Euro, but constantly predicting its demise is a mugs game - see how £/Euro has barely moved recently to see what the markets think. The Euro will survive this battle, as it has all previous ones where we were confidently told it was about to break up.

Definitely a modern day version of an old nursery rhyme- "This is the house that Jacques (Delors) Built" could be written- and should be! I wonder how many small (and not so small) events can be connected to this master plan that is beginning to unravel so inexorably. The dreams of a few "men of vision" are going to end in nightmares for so many as the Grand Project collapses because it was rushed and jerry built with a view to making it into the history books in double quick time-preferably before the mythic date of 2000 that was transfixing so many of these "visionaries". I am reminded of the words of the UK marketing director of the French state owned computer giant Bull Computers. He told me that "In the UK we question an idea and ask ourselves will this work in practice? In France it's always a question of does this work idea in theory?" That sums it all up- it's a wonderful idea- the bigger the better but it just wont work. As it is said "The bigger they come, the harder they fall". It's going to be a heavy fall, that's for sure.

I can’t believe the rhetoric of the comments, speaking in a past tense as if the euro has already been broken up. Wake up gents its not going to happen. The euro is in a much stronger position than the pound or for that matter the dollar. Yes it has its problems but these are not insurmountable.

The solution does lie within the EU - it's just not the EU are talking about. What Brussels should be doing is reminding Greece, Spain and Portugal of their obligations and giving them a 30-day deadline to lay out a programme for meeting them or be expelled from the currency union. Instead, Greece is being allowed to hold the rest of Europe hostage to its own fecklessness. There is little hope that the union will work, it's a bad idea executed poorly, but it is certainly doomed if its leaders constantly compromise their principles.

I suspect that any attempt to bail out the stricken Greek economy will only delay the inevitable break-up of the European single currency. This debacle among the Club Med banana republics has simply highlighted how flawed the euro project was from the very beginning. The insoluble underlying problem is the huge difference in competitiveness between the richest and poorest members. Club Med have no incentive to keep their debts under control since they are able to run these up under the radar until there is a crisis when they will be bailed out by the likes of Germany. The alternative would be for these weak, peripheral members to suffer years of painful deflation and tumbling living standards, as well as draconian budget cuts. Since their political stability is no greater then their economic stability, that is a non-starter. The kiss of death was surely given to the single currency when my Lord Rumba of Rio gave his unquestioning support and called for Britian to join this doomed experiment.

BD Mathers writes: "How many people predicted that this would happen all those years ago!!" Actually I did (though I am not a journalist or anyone famous). My question from the start was: how can one currency support twenty-odd different economic foundations? The truth is it can't. Sooner or later the entire structure must collapse and I think we are seeing the cracks already. I find it interesting that Greece finds itself in economic mire and that within days Eurpoen leaders are rushing to decide what can be done (all with very serious expressions) and, hey presto, no more than a day or so later it's all smiles and gosh, look how clever we are. Though they are not so clever that they can account for the billions (yes, BILLIONS) that have gone missing! Someone a few months ago said that they didn't realise that some eastern European countries would be such an economic drain! A five year-old could have told that person that. Do these people go home every evening or do they beam up to some remote planet 'cause they certainly are not living on this one?

Remember Black Wednesday - September 15th 1992? Britain ignominiously leaves the ERM. France gloats, Germany gloats. They do nothing to save sterling. Actually it turns out to be White Wednesday: Britain recovers so that by 1997 her economy is as healthy as it has ever been. Then New Labour comes in. Blair is determined to take Britain into this new fangled currency but the combination of Hague's 'Save the Pound' campaign and Goldsmith's specially formed Referendum Party leads Blair, between very gritted teeth, to promise a referendum on the euro - a promise he never dares to put to the test because he knows he would lose it. The Conservatives refuse to discuss Europe sensibly because they wrongly think it will lose them the election. They lose it anyway giving Blair a third term. Then Cameron pretends to be eurosceptic and makes a cast iron promise to hold a referendum on the Lisbon Treaty whether or not it has been ratified. His terror of actually winning the election - at one time he had a 20 point lead in the polls - leads him to renege on his promise which will cost the Conservatives the election this year. If Cameron wants to win the election two things must happen: i) he must promise an IN or OUT referendum on the EU; ii) People must suspend their disbelief and, against all the evidence, believe him. Do you trust either Labour, the Conservatives or the Lib Dems on Europe? Of course you don't. Vote UKIP

FOR WHAT IT'S WORTH: Greece is broke because it was led up the Garden path by its treacherous leadership, who were directed, persuaded, blackmailed and promised a what ever you want deal by the TALMUDISTS, hence don't be surprised if they privatised everything leaving an angry Greek populous to be bartered into slavery. Fiendishly devious, but i fear successful, only because the next fish in line, cannot see the hook, neither can those countries busy selling off their Airports, water systems, electricity, gas,infrastructure that belongs to the nations people and not a passing by Government. Oh how the Talmudists love a dance, by the treacherouse UK leadership in front of their populous's and now the dance turns into fake tears and reminsicence over a child THE JOB of treachery didn't even allow them to spend that much time with, let alone miss the bond, but hey presto there's an election to lose here. The EU will only ever cause discontent, because the IMF, is a Talmudic organisation which stifles the national interests of each nation state and pits one nation against another, thus once a nation bites on the hook, it's survival is dependent on anothers destruction, or misfortune. The IMF....Who the hell do you think they are? Did you elected any of them?No, they are the Talmudic force which controls world finance and shall destroy the morality and menatal stability of all, unless we wise up to these psychpaths!!! The IMF for fuuuurg sake!

"The reason this would best be provided by the IMF has little to do with the fact that it is technically illegal, under the Maastricht Treaty's no bail-out clause, for EU members to do so themselves. The legislation that underpins the euro has already been tested to destruction, and as it stands is now largely irrelevant." The EU has already descended into illegtimacy - democratic, political and moral - and if the law is also now to be debauched it will have thus descended into illegality as well and the rule of law overthrown. If this law is deemed now to be 'irrelevant' why then should any law of the EU be deemed 'relevant' and thus be obeyed? To disobey the law as set out in the Maastricht Treaty is to espouse nothing less than anarchy. I loathe the EU and all its wicked, mendacious, despotic ways. It must not be allowed to get away with trashing the rule of law in this way. The British Government should insist that not one single Euro Cent be given to the Greeks whose lies, deceit, cheating, greed and stupidity has led them into the mouth of financial armageddon. Let them go cap in hand to the IMF like everyone else has to. After all, in 1992 when Britain experienced "White Wednesday", neither the Greeks nor any other of the duplicitous EU States lifted a finger to help us. Let them go hang in the wind.

To much fiddle going on! in the Euro zone, for the powers that be to let the Euro crash!.

How many people predicted that this would happen all those years ago!! Even my father, whose understanding of economics and politics could be written on the back of a tiny matchbox, foresaw this would happen. It seems that politicians can't help themselves when it comes to building empires and dynasties. Ego, ego and more ego

An interesting article and one that has hi-lighted the present crisis for me and made it more understandable. However,I would have liked to have some information on how this may affect us here in the UK, I know we don't have the euro, thank god, but it will effect us if Greece defaults on her loans as they are with British banks. Will be be brought into the Eurozone by this crisis by this government or the next? Most of all will be have the choice of in a referendum. This is not the end but the beginning of the end for the euro, is it, that is the question? Germany and France got what they wanted in the monster EU, but they're failing to take the control to defend it and have resorted to their own borders, so much for togetherness.