Has Germany Killed the Euro Dream?

Ambrose Evans-Pritchard Daily Telegraph March 22, 2010

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By Ambrose Evans-Pritchard Published: 7:29PM GMT 21 Mar 2010

Comments 6 | Comment on this article

German Chancellor Angela Merkel has little hope of selling a bail-out of Greece to German voters

German and Dutch leaders have concluded in the nick of time that they cannot defy the will of their sovereign parliaments by propping up a country that lied about its deficits, or risk court defeats by breaching the no-bail-out clause in Article 125 of the EU Treaties.

Chancellor Angela Merkel has halted at the Rubicon. So has Dutch premier Jan Peter Balkenende, as well he might in charge of a broken government facing elections in a country where far-right leader Geert Wilders is the second political force, and where the Tweede Kamer has categorically blocked loans for Greece.

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The failure of EU leaders to cobble together a plausible bail-out – if that is what occurs at this week’s Brussels summit – is a

'game-changer' in market parlance. Eurogroup chair Jean-Claude Juncker said last month that such an outcome would shatter the credibility of monetary union. It certainly shatters many assumptions.

There will be no inevitable move to fiscal federalism; no EU treasury or economic government; no debt union. It is Stalingrad for the federalist camp and the institutions of the permanent EU government.

I remember hearing Joschka Fischer, then German Vice-Chancellor, telling Euro-MPs a decade ago that EMU was “a quantum leap ... creating an inexorable federal logic”. Such views were in vogue then.

Any euro crisis would force Europe to create the necessary machinery to make it work, acting as a catalyst for full-fledged union. Yet the moment of truth has come. There is no quantum leap. We have a Merkel pirouette.

Paris is watching nervously. As Le Monde put it last week, “behind the question of aid to Greece is a France-Germany match that pitches two conceptions of Europe against each other.” The game is not going well for 'Les Bleus’. The whole point of the euro for the Quai D’Orsay was to lock Germany into economic fusion. Instead we have fission.

EU leaders may yet rustle up a rescue package that keeps the IMF

By Ambrose Evans-Pritchard Published: 7:29PM GMT 21 Mar 2010

Comments 6 | Comment on this article

The failure of EU leaders to cobble together a plausible bail-out – if that is what occurs at this week’s Brussels summit – is a

'game-changer' in market parlance. Eurogroup chair Jean-Claude Juncker said last month that such an outcome would shatter the credibility of monetary union. It certainly shatters many assumptions.

EU leaders may yet rustle up a rescue package that keeps the IMF at bay, but alliances are shifting fast. Even Italy has slipped into the pro-IMF camp, knowing that rescue costs can be shifted on to the US, Japan, Britain, Russia, China, and the Saudis, lessening the burden for Rome.

Besides, too much has been said over the last week that cannot be unsaid. Mrs Merkel’s speech to the Bundestag was epochal, a defiant warning that henceforth Germany would pursue the German national interest in EU affairs, capped by her call for treaty changes to allow the expulsion of fiscal sinners from Euroland. Nothing seems so permanent about the euro any more.

Days later, Thilo Sarrazin from the Bundesbank blurted out that if Greece cannot pay its bills “it should do what every debtor has to do and file for insolvency. This would be a suitably frightening example for every other potentially unsound state,” he said, pointedly excluding France from the list of sound countries.

Dr Sarrazin should be locked up in a Frankfurt Sanatorium. It was such flippancy that led to the Lehman disaster, requiring state rescues of half the world’s financial system. A Greek default would alone be twice the size of the combined defaults by Argentina and Russia. Contagion across Club Med would instantly set off a second banking crisis.

Some suspect that ultra-hawks in Germany want to bring the EMU crisis to a head, deeming delay to be the greater danger. How else to interpret last week’s speech by Jürgen Stark, Germany’s man at the European Central Bank, calling for tightening to head off inflation.

This is alarming. Core inflation in Euroland was 0.9pc in February, the lowest since the data series began. It is certain to fall further as the doubling of oil prices fades from the base effect. M3 money has been contracting for a year. Business credit is shrinking at a 2.7pc rate.

So, it is not enough for the EU to impose a fiscal squeeze of 10pc of GDP on Greece, 8pc on Spain, and 6pc on Portugal, and 5pc on France over three years, we need a dose of 1930s monetary policy as well to make sure life is Hell for everybody.

Be that as it may, Greece’s George Papandreou says his country is in the worst of both worlds, suffering IMF-style austerity without receiving IMF money – which comes cheap at around 3.25pc. So why allow his country to be used as a “guinea pig” – as he put it - by EU factions pursuing conflicting agendas?

The IMF option has its limits too. The maximum ever lent by the Fund is 12 times quota, or €15bn for Greece, not enough to nurse the country through to June. The standard IMF cure of devaluation is blocked by euro membership. So Greece will have to sweat it out with a public debt spiralling to 135pc of GDP next year, stuck in slump with no exit route.

The deeper truth that few care to face is that under the current EMU structure Berlin will have to do for Greece and Club Med what it has done for East Germany, pay vast subsidies for decades. Events of the last week have made it clear that no such money will ever be forthcoming.

Let me be clear. I do not blame Greece, Ireland, Italy, or Spain for what has happened. No central bank could have tried more heroically than the Banco d’España to counter the effects of negative real interest rates, but the macro-policy error of monetary union washed over its efforts.

Nor do I blame Germany, which generously agreed to give up the D-Mark to keep the political peace. It was the price that France demanded in exchange for tolerating reunification after the Berlin Wall came down.

I blame the EU elites that charged ahead with this project for the wrong reasons – some cynically, mostly out of Hegelian absolutism – ignoring the economic anthropology of Europe and the rules of basic common sense. They must answer for a depression.

Comments: 6

How very odd. Nobody in the EU seems to see the situation as displayed here. Nobody in Germany sees this as the end of the Euro. All the serious newpapers today in Germany are busy reporting the passing of the healthcare bill in the US. There is no hysteria about the collapse of the Euro,not even in the rags. All this is the usual wishful thinking and schadenfreude from the usual core of anti EU opponents. Focus on the serious economic problems in the UK instead.

What possible future for the Euro as a currency if it has a revolving door of member states?

The last paragraph hits the nail on the head. This is not an economic crisis - merely a political crisis that has displayed its first symptoms in the economy. For decades the real will of the people has been obfuscated and ignored - and the people have been complicit in this act, too. Not so much a Great Depression as a Great Con(fidence trick). Electorates have not held the elected to account, the elected have surrendered powers to non-elected consultants and un-elected officials. All 3 have resolutely failed to hold their responsibilities to account. Fred Goodwin no more ruined RBS than you, Ambrose. He needed board support to run the bank and share-holder support for the board. Combine this with useless govt. oversight and useless parliament oversight of the govt. and useless public oversight of parliament and we get to where we are now. What contributed also has been the dreadful advocacy journalism of the past 30-40 years which can excuse any public or private malfeasance for a reason. The trouble for, well, everyone, is that no substantive alterations have been made to "hardware" of our economic/political systems. No removal of party affiliation from the ballot papers, no development of longer term elected positions, no politically independent guarantor of the currency, no alterations to the ways we mis-measure economic statistics for transient political gain. We have spent trillions to rebuild the very system that destroyed the system. What has just gone down over the last 2/3 years is the "one last bet" of the indebted gambler which will only get us back to status quo ante and doesn't solve the real problem which is the desire to gamble. This will not stop in one form or another until the political machine is properly fixed, the economic stupidities that it allowed to flourish eradicated and its debts liquidated. To take the UK - the Chancellor is only talking of reducing the deficit. When this phase washes through we will have a debt of c. 100% of GDP (the debt to which HMG admits anyway). No party is talking of lowering it just lowering the speed of its increase. Under the current M.O of government I would not be surprised to never see this debt ever, ever, fall again. There are two options: let it go bust over night and deal with a sudden catastrophe or let it slowly strangle us

Amazing! The Fire Brigade (German and Dutch Governments), is confined to the Fire Station for Health & Safety reasons! The brigade bickers amongst itself! Whilst this farce occurs, a friendly club member (Greece) is on economic fire. It is in a state of economic meltdown as a direct result of the rules of the Euro Club (EMU)! This meltdown will soon turn to social unrest on an unprecedented scale. Greece is the first of the PIGS to stand on the brink, but the point of failure is when the Fire Brigade refused to leave the station – i.e. we are already past that point! For Greece, it’s time for Loss Minimisation: take the IMF money asap; convert ALL monetary contracts to the New Drachma and float the New Drachma. Strive to re-establish economic viability by pursuing the cuts to the public sector. In the short term, market Greece as a (cheaper) tourist destination to stimulate some employment. For us, prepare for a European Banking meltdown and redirect our export efforts from Europe to the rest of the world. In terms of the EU, we have backed the wrong horse politically – its institutions are not only undemocratic, they are simply not up to the job and their leaders are too parochial. Economically, it is dysfunctional! For the other PIGS – GET OUT OF THE EURO (new DMark) QUICK!

Greece has the most generous pension scheme in the EU, with a retirement age of 60. Many pensioners getting 90% of wage. Why should the state pensioner in the UK work to support this? Hey, we can send them Gordon Brown and prudence

As usual a very good analysis by AEP. The conclusion, to borrow a phrase, this may not be the end of the Euro but it is certainly the beginning of the end.

hurrah what not a surprise angie is sweetheart