It’s Gerry!

Spectator – Germany’s eurozone dilemma: should they stay or should they go? By Gerard Baker

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.

Hah. Apparently Spain’s getting bailed out next. Wunderbar!

The Bundesbank, and most of Germany’s economically numerate leaders, were dismayed by the idea of monetary union. The deutsche mark and the central bank were the most revered institutions in postwar Germany. After the inflationary trauma of Weimar and a brief rerun at the end of the 1940s, a strong mark backed by a disciplined central bank were seen as Germany’s anchors against the economic and political woes of inflation. They demanded that the mark be replaced by something just as strong, backed by a central bank modelled along the fiercely independent lines of the Bundesbank: keeping inflation under control, and having independence from political interference.

It is no accident that the European Central Bank is based in Frankfurt. It was to reassure the Germans that the euro would be independent from political control, and that it would follow German values: keeping inflation under control.

The Germans sought more guarantees. After the costs of German unification, they wanted to ensure they would never be required to be the fiscal backstop for the weaker members of the new currency. As a final concession to German concerns, a ‘no-bailout clause’ was written into the euro. If a country did get into fiscal difficulty, it was on its own. …

They lost that fight, and now, ten years later, it is clear that they’ve lost almost everything else they were promised too. The Maastricht criteria have been unceremoniously discarded — deficits and debts in much of the eurozone have spiralled upwards. The no-bailout clause has, with the Greek rescue plan, gone the same way. Most alarming of all, perhaps, the careful protections that were to ensure the independence and strength of the ECB have also been abandoned.

Great plan, eh? I’ll skip the bit about how the Eurocrats make the single currency even more unified, and rich Germany ends up getting outnumbered by poor countries voting to relieve the Germans of all their cash (funny how things always move in that direction in politics)…

The solution to all this is increasingly obvious. If the Greeks were to be ejected from the eurozone, the implications for Europe’s economy might be devastating. The revived Greek drachma would immediately experience a massive devaluation against the euro. Since all its debts are denominated in euros, it would quickly be unable to meet its obligations. This would not only cause the Greek economy to crash, it would cause havoc for European (including German) banks.

They might be able to survive default and the collapse of the Greek economy, but as the contagion spread, and it became clear that Portugal and then Spain were next in line to exit the euro, the financial panic would deepen.

So a Greek departure from the eurozone is almost unthinkable. But there’s a better option. If Germany left the eurozone itself, it would at a stroke free itself from an increasingly intolerable fiscal burden and leave the weaker countries with some chance of managing their way out of crisis. The euro would presumably decline sharply against the deutsche mark, but that would not necessarily bankrupt the Greek government and companies, because their debts would still be payable in euros.


PS: I really have missed my Friday Gerard Baker columns in The Times, sigh.