Roger’s retirement as an MEP has released his pen (or keyboard) and he’s writing better than ever. This came in this morning –
The euro: Ever deeper in the hole
It was only the back end of October when Merkel, Sarkozy et el (“Merkozy”, let’s say) announced the final solution to the euro crisis. But in the event, it took only days to unravel. There were three elements:
First, bond-holders would accept a “voluntary” 50% cut. But it’s not clear that they’d agreed to do so — or even who all of them were. But this decision casts huge doubt on the sovereign debt of all the other eurozone laggards, so helps to spread contagion.
Second, recapitalisation of vulnerable eurozone banks. But by how much? By whom? Where is the money to come from? Remember many of these banks will have just taken the hair-cut!
Third, a leveraging-up of the EFSF. But by putting existing sovereign investors on a “first loss” basis (the only way, they thought, to attract new money) this will ramp up risk of sovereign defaults by inter alia France, which would lose its AAA rating just before a Presidential election.
In any case, it’s clear that China and the other BRICs want no part of such a plan. Quite reasonably, they feel it’s an issue for the Europeans to sort out.
Then the EFSF has its own problems. A recent EFSF bond issue failed, and yields have increase dramatically. Japan, an early EFSF investor, is nursing big losses.
Then there’s a new bombshell that Merkozy has accidentally dropped into this explosive mixture. They forced former Prime Minister Papandreou of Greece to back down on his referendum proposal by threatening Greek expulsion from the euro (and from the EU, though it’s not clear what would be the legal basis for such a move).
But that shattered the fundamental myth of the eurozone — that it was a monolith that might increase with new members, but would never let an existing member go. If Greece can go, so can others. So the markets will now be pricing in the risk of other eurozone members leaving the currency union — further driving contagion.
The Euro’s Catch-22
It’s time for Merkozy to recognise that there is no way out. While a fiscal/debt union with a single Treasury and a single Finance Minister is theoretically workable in economic terms, it is no longer sustainable politically.
Why not? Because it entails massive, open-ended fund transfers from German tax-payers to Greece, Portugal, Italy, Spain…. and so on. The Germans have spent twenty years bailing out the East. They will revolt if asked to keep paying for the South for another twenty years — or forever.
And tragically the only workable solution — an orderly breakup of the euro, either into a garlic (Southern) euro and a wurst (Northern) euro, or into relaunched national currencies — is blocked by that much-vaunted political will that we’ve heard about so often.
Yet remarkably the Centre for Economics and Business Research has just published a report suggesting that a euro break-up would be good for Britain — and for the eurozone. They say that while it would result in turmoil and recession, the negative impact would be short-lived, and that by re-adopting national currencies and market-driven exchange rates, growth would resume, just as it did in the UK when we left the ERM.