Germany’s eurozone dilemma: should they stay or should they go?

19 June 2010

The euro is in crisis, and Germany is footing the bill. An obvious solution is emerging: rather than Greece being kicked out, Germany itself abandons the currency. Gerard Baker thinks the unthinkable

As the euro continues to dance on the brink of calamity, the people responsible for the deepening debacle have finally come up with a scheme that will save it once and for all. It’s a cunning plan that draws heavily on that old joke about a European heaven and hell. You’ll be familiar with it: in heaven the police are British, the cooks are French and the engineers are German; while in hell, the police are German, the cooks are British and it’s all organised by the Italians.

The euro version goes like this: fiscal policy is run by the Greeks, the Spanish and the Italians; interest rates are set by a central bank in thrall to politicians in France and Italy, and it is all organised by a Portuguese socialist and a Belgian. The idea will go down a treat in places like France, Greece and Portugal. But if you’re German — an increasingly disgruntled citizen of Europe’s largest and most productive economy — you might be starting to think it represents a final signal to get the hell out of there.

I exaggerate, of course. The EU summit is destined to break up without any firm plan being agreed. The hope in European capitals is that the E750 billion bailout plan announced early last month will provide enough sticking plaster to get them through the next few months and perhaps into some kind of tolerable recovery.

But it’s a forlorn hope. The euro continues to plummet on foreign exchanges. This week all eyes are on Spain, where investors are betting a Greece-style bailout is coming down the tracks. As various disaster scenarios are pondered, a consensus is forming among moneymakers and policymakers: the euro, in its current form, cannot survive.

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Hugh

June 17th, 2010 8:22pm Report this comment

I thought that the EU has had a max 3% of GDP deficit rule; they do not seem to have bothered to enforce that, how can they expect to do any better with this new ploy.

denis cooper

June 18th, 2010 10:59am Report this comment

There was another option - that the EU would actually obey its own treaties.

As you imply, the eurozone bailouts are illegal under the treaties, compounding the previous illegalities through which countries were allowed to join the euro despite not meeting the convergence criteria, and were then allowed to run up excessive debts in contravention of their treaty obligations.

Whatever happens now on the economic front, half a billion people in Europe are now living under arbitrary rule, not the rule of law, and ultimately the consequences of that may well prove far worse than the economic impact.

ROBINA bull

June 19th, 2010 4:49pm Report this comment

Today the euro is at 1.24 to the USD as it was one month ago and has been rising for 2 weeks. So why inform Spectator readers that "The euro continues to plummet on foreign exchanges." Or does one plummet upwards?

Matt Andersson

June 21st, 2010 3:53pm Report this comment

Germany's general sentiment to assist failing EU states may not only be misplaced, but futile. Public sector financial weakness is merely a symptom of an underlying cause: a mix of inherent social and cultural propensities that define collective behavior, including those at a political and public institutional level. In other words, a country's financial functionality reflects its cultural functionality (or is it the other way around).

Germany however, is helpless to effect adjustments of that magnitude of intractability to its less functional neighbors. And attempting to change behavior indirectly through public financial assistance is equally futile (this is a separate issue from making its core banking sector whole from exposure to failing intra-EU public treasuries).

Absent an exit from the euro and a re-establishment of the D-mark, the only other rational path for Germany may be to fundamentally restructure the terms of the single currency pact. This would likely include a more formal German centralization of currency management and especially, a more deliberate hierarchy of public sector EUR currency terms and enforcement, including more disciplined EU-member treasury borrowing and issuing rights. Otherwise, Germany’s current financial rescue largess may needlessly put its sovereign credit at risk, while undermining the competitive vitality of its private sector.

Matt Andersson
Chicago, US

A. MacAulay

June 23rd, 2010 6:52am Report this comment

It's a nice idea and many, many Germans would support it but no party is prepared to break with the post-war consensus and give them a political direction.

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