In 1999, when the euro was created, Milton Friedman famously predicted its demise within the next ten years. It seems that he was wrong only by three years, for everything points to the Eurozone’s dissolution in the coming fall 2012.
Let’s go back to the beginning of the crisis: Greece, the weakest link in the Eurozone, was the first to give way in 2009. The sheer size of the national debt made it obvious to every analyst then that Greece was destined to default. The only reason it (barely) survives to this date was because the Germans had to (a) save their banks who were exposed to Greece’s debt and, more importantly (b) to take time in order to decide what to do with the Eurozone.
The Germans understand very well the historic role of their country in Europe, and their obligation to preserve the European Union. Their dilemma since the beginning of the Greek crisis has been whether to preserve the Eurozone as well. It is precisely this dilemma that makes them appear “indecisive”.
It seems that, at least back in 2009 and till recently, they honestly tried to save the Eurozone. They “punished” the Greeks hoping that the terrible plight of the “profligate” Greeks would send a strong message of confidence to the markets, as well as to the rest of the southern peoples to whom, sooner or later, the same bitter medicine was going to be administered.
The markets were not impressed. Spain and Italy, although they were amply terrified in accepting the German plan for the preservation of the Eurozone, find themselves today on the brink of disaster. Greece’s problem, because it was systemic and had to do with the structure of the Eurozone (the obvious weakness that was so obvious to Friedman and many others), spread contagiously to all the other Eurozone economies that the markets deem uncompetitive. Until the latest eurosummit Germans seemed to command the field and enforce their terms.
But in the latest Eurosummit something obviously changed. The German plan for preserving the Eurozone, based on austerity and rapid internal devaluation, was deemed a failure. The Spaniards and the Italians, fully aware that they had now entered the spiral of death, “revolted”.
Germany must now face this internal revolt by deciding if it will go ahead with a federalization of the Eurozone or not. I believe it has already decided the latter, and here is why.
The federalization of the Eurozone sets two insurmountable problems for the Germans. The first is fiscal: the German taxpayers must take up the colossal cost of bailing out Italy and Spain. The second problem is historical and political: the Germans believe, correctly, that the European Union is more important than the Eurozone. If they proceeded with the federalization of the Eurozone they would create enormous issues of democratic legitimization in the northern countries, since it would mean that the northern taxpayers would have to forever transfer part of their taxes to the support of the southern states. Additionally, the federalization of the Eurozone would marginalize countries that are not members. In other words a federal Eurozone would mean the end of the European Union. The British understand that very well, and have said so in many ways.
If one follows carefully the rhetoric of the German chancellor and her cabinet after the latest Eurosummit, it is rather obvious that the Germans have taken the only logical decision they could take: to abandon the euro in the coming fall.
Germany abandoning the euro would give breathing space to the economies of the south since it will mean the considerable devaluation of the euro. Germany has enough power to manage effectively the reintroduction of the mark, which will probably happen in stages.
A cheaper euro does not guarantee by itself the rescue of the European south, nevertheless it will give time to governments to enact the necessary reforms, while creating a better investment environment. The southern states, following Germany’s departure (and possibly a few other German satellite states), will have the time to decide whether to keep the devalued euro or return to their national currencies. I believe that ultimately they will opt for the latter; the transition being far smoother in conditions of a devalued euro. Quite possibly the euro may be preserved as a “second” currency to facilitate trade and travel in the EU.
George Soros recently gave Eurozone till fall to take the right decisions for its preservation. If these decisions are not taken then the desperate peoples of the south and the angry people of the north, together with the markets, will decide instead of the governments and the result will be the catastrophic defaults of Greece, Portugal and Spain followed by the collapse of the Eurozone. I believe the Germans will not let this happen and that they will thus leave the euro in good time.