As is very clear from this week's reaction to last week's EU summit, the UK veto is just one part of another EU disaster that is still waiting to happen.
No credible plan for the Euro emerged. This is not surprising. There are only two options, in reality. Either Germany pays for the rest of the EU to join it in the Euro or the rest of the Euro pay for trying to be like Germany. The third option is economic collapse: only the scale needs discussion.
The Germans can, of course pay. The question is, will they?
The rest of Europe cannot become like Germany. That is technically impossible. We can't all have surpluses: there have to be deficits on trade and even on spending. That's an accounting fact. Trying to all be like Germany is therefore doomed to failure - and like the Merkozy pact first guarantees recession, second destroys social democracy and third is a guarantee for chaos. These are facts.
That leaves economic chaos sooner or later, which is much like option 2, or the pact on which agreement was reached.
Governments cannot deliver option 2. It will not happen.
Option 3 - economic chaos, arrives early in the new year when Italy cannot refinance its debts.
So it's down to Germany, to pay or not; to deliver chaos or not; to spite itself, or not.
That's all that's left to speculate on in the short term.
The long term is another story. But in this case the short term is too real to get too worried about the long term, yet. Except to note that's why Cameron was wrong: he had to be present for the short term to make the difference in the long term. And he isn't. Which is why he's wrong.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Hi Richard,
I think your wrong, in the sense that Germany’s pays or doesn’t pay is the wrong dichotomy.
Germany can’t by itself solve the structural problems of the Euro. It could implement a massive stimulus package which would suck in goods from the rest of europe fixing the trade imbalance, which might keep the euro on life support for quite awhile. But there are fundamental problems which will fuel every future economic crisis.
But for the euro to properly work is a political decision. A decision to effectively create a eurozone country with its own tax and spend powers, that allows transfers through being a state from the rich parts to the poorer parts through welfare payments etc. With the ECB allowing the sale of eurogov bonds. I have trouble seeing this happening, so I can only assume that the euro will eventually collapse, but only after every stupid idea is tried.
The fallout from the collapse of the euro will be immense and I think sends shudders through many euro country government’s treasuries.
Kevin
except you might have noticed the 26 is not actually 26. The whole charade is unravelling. The smoke is clearing and the mirrors are becoming visible. Are they all wrong?
It’s been suggested to me by a banker that the Eurozone would probably have to split into a Northern zone and a Southern zone.
The Northern zone would comprise the Scandanavian countries and Germany, the Southern zone would comprise most of the rest. What surprised me is that the status of France is uncertain according to my informant.
One solution could be for the ECB to “print” the money, buy up the debt, but demand that the banks keep the funds they accumalate from this as an accounting measure.
Of course, Germany shies away from the printing money option because of the spectre of the Weimar Republic.
Of course, the real solution would be to abandon monetary union and let European countries have their own central banks once again,
What exactly would Germany pay for? Italian hairdressers who earn in excess of 100K euros to coiffe the hair of parliamentarians? the inalienable right of SNCF workers to ship goods at 10% of market? a Greek train system which is so costly that putting every passenger in a taxi would be cheaper? etc. etc. Reform is needed.
I know the idea and practice of “austerity” can be offensif, so let’s stick to the idea and practice of “reform”. It is needed. And the proposal that Germany “pay for” the outrageous and – at a distance – laughable excesses of southern Europe offends common sense too much to fly – at least I hope!
You are being ridiculous
Of course we know reform is needed
But these are from Daily Mail land
Sha;; we stock to some real economics? There are fundamentals to worry about and all you can deal in is pedantry apparently motivated by bigotry. That’s what will create the real crisis if it continues
Pedantry, bigotry, unreal economics and Daily Mail are some strong words for an oppositional point of view: easy on there; you are not the only person taking this seriously.
So long as you don’t want to see truth – in this case entrenched waste – you won’t see it. But it will still be there. Good luck.
What you define as waste by be nothing of the sort
No system is perfect
The alternative to what you oppose may be very much worse
“The Germans can, of course pay.”
They can afford to if they borrow a bit more, but one of the sticking points is that if they did they would have to borrow so much that they themselves would fall foul of the agreed borrowing limits and thus be subject to fines.
It is more likely that the Germans will try to bully other countries into cutting their spending and try to encourage the Chinese to fund the rest of the eurozone – which probably won’t work.
The French socialist party has made plain its disagreement with the outcome of the summit, which it says does not respond to the urgency, installs austerity, renounces the fight against speculation and weakens democracy.
http://www.parti-socialiste.fr/communiques/sommet-europeen-0
François Hollande has set the cat among the pigeons by announcing that if – as seems quite likely – he is elected president on 8 May he will renegotiate the treaty to add what he sees as missing, namely intervention of the ECB, eurobonds and a “fonds de secours financier” (not sure how best to translate that, but I take it to mean some sort of bail-out fund for countries in difficulty?).
http://www.parti-socialiste.fr/articles/francois-hollande-je-renegocierai-l-accord-sur-le-projet-de-traite-europeen
The thought is that any treaty could not be fully ratified before May, so could still be open to modification. Whether he would have any chance of success in such an enterprise is another matter, but his statement has provoked outrage in the Sarkozy camp.
Richard, I recently put forward another option (Compulsory Bond Purchase — CBP) for tackling sovereign debt crises in a letter to the Guardian published on 2 December. It is the second letter in the following web page:
http://www.guardian.co.uk/politics/2011/dec/01/all-together-divide-and-rule
CBP effectively requires high-earners in the affected country to supplement the income tax they pay with interest-free lending to their own government. This would surely be preferable to depending on either the German taxpayer or on Eurobond issues (which would ultimately amount to the same thing). It also seems preferable to a fiscal-union-type solution in which unelected Eurocrats would impose “austerity” (a euphemism, surely, for “making the poorest take the pain”) over the democratically expressed wishes of the electorates of those countries. And, unlike the Tobin tax, it could be implemented country by country, without international agreement, as the need arises. My idea has been greeted with total silence in the Guardian, so I guess it must have some flaw in it (like all previous ideas, apparently!) As a theoretical physicist, rather than an economist, I should appreciate a reasoned analysis as to what the flaw is, if their is one.
I feel we may be missing the point in this discussion. The people of Greece, Italy and Sth Europe for that matter, see the solution to the problem – leave the Euro. But it’s not happening. Why? Politics. The eurocrats have a dream – One Europe. We all sit here and say “it will never happen”. But it is happening and has been for the last 50 or so years- step by step. When this crisis began earlier in the year, I told my friends that the discussion (on solving the crisis) would eventually move to talk of fiscal union. Guess what? It has.
The Eurocrats are driving the agenda whether the common people like it or not. And they don’t have the interests of the 99% of the people at heart – they have more in common with the bankers and financiers. Which is why austerity will unfortunately reign, and the banks will get their pound of flesh. Unless, we take hold of the agenda. I salute Richard and other scholars in this area for trying to do this. Remember Iceland? It can be done.