It is time to prepare for the unthinkable: there is now a significant probability the euro will not survive in its current form. This is not because I am predicting the failure by European leaders to agree a deal. In fact, I believe they will. My concern is not about failure to agree, but the consequences of an agreement. I am writing this column before the results of Sunday’s European summit were known. It appeared that a final agreement would not be reached until Wednesday. Under consideration has been a leveraged European financial stability facility, perhaps accompanied by new instruments from the International Monetary Fund.
After some technical details, Wolfgang cuts to the chase:
The simple reason why there can be no technical quick fix is that the crisis is, at its heart, political. The triple A-rated countries have left no doubt that they are willing to support the system, but only up to a certain point. And we are well beyond that point now. If Germany continued to reject an increase in its own liabilities, debt monetisation through the European Central Bank and eurobonds, the crisis would logically end in a break-up. There is no way the member states of the eurozone’s periphery can sustainably service their private and public debts, and adjust their economies at the same time.
Each of Germany’s red lines has some justification on its own. But together they are toxic for the eurozone. The politics is not getting any easier. The behaviour of the Bundestag underlines the political nature of the crisis. Last month’s ruling of the Germany’s constitutional court strengthened the role of parliament. But it also reduced the autonomy of the German chancellor, who now has to seek prior approval by the Bundestag’s budget committee before negotiating in Brussels. This power shift will not prevent agreements, such as the one currently negotiated, but it will make it harder to co-ordinate policy in the European Council on an ongoing basis.
Is Europe heading for a catastrophe, though they are experts always in not calling a catastrophe a "catastrophe."
Policy co-ordination among heads of state is both undemocratic and ineffective. A monetary union may require more than just a eurobond and a small fiscal union. It may require a formal, if partial, transfer of sovereignty to the centre – that includes the rights to levy certain taxes, impose regulation in product, labour and financial markets, and to set fiscal rules for member states.
Under normal circumstances, European electorates would not accept such a massive transfer of sovereignty. I would not completely exclude the possibility that they might accept it if the alternative was a breakdown of the euro. Even then, I would not bet on such an outcome. Current policy is leading us straight towards this bifurcation point, which may only be a few weeks or months away.
The biggest danger now is the large number of politicians drawing red lines in the sand, and the lack of even a single EU authority willing and capable of cutting through them. Given the multiple uncertainties, there is no way to attach any precise probabilities to any scenarios. But clearly, the chance of a catastrophic accident is bigger than merely non-trivial. The main consequences of leverage will be to increase that probability.
Anyone who believes that all the Eurozone members will vote to cede some more sovereignty to the faceless arrogant unelected gnomes of Brussels has my sympathy and should see their local pharmacist.
Michael Lewis's recent Vanity Fair article that quoted a German economist who predicted catastrophe if the Germans ever abandoned the Deutschmark is a prophet.
And those in the UK calling for their adoption of the euro should head for more than a pharmacist, because intensive psychiatric treatment is the only way to treat delusional disorders of that magnitude.