There is only one way for the eurozone to be saved, and that is for Germany to pay for the gain it has got from the eurozone by transfers to the PIGS.
No sooner has the ill-conceived Greek bail-out been signed off, than the market’s attention switched to Spain, even as the Greek “solution” starts unravelling. And technocrat Monti’s Italian solution is coming unstuck a few days later, to the point where he has refused to publish any more economic data this year: delays in publishing financial data means problems, but publishing no data at all means another disaster is in the making.
The dominoes are getting ready to fall, and all the German Vorsprung Str-e-tch Technic bandaid in the world cannot stop the eurozone doing the horizontal splits, between North and South, sometime soon: it’s a no-brainer.
The major problem is structural, meaning it is baked into the euro-cake and is not about to go away, and was highlighted in a report by Germany’s CESifo Institute: since the introduction of the euro, relative to the median, inflation in the PIGS (including Ireland) has been 30%, whereas Germany has seen deflation of 22%, which means the productivity gap between the PIGS and Germany has been growing ever-wider by a steady 5% per annum.
Factor in the different levels of collectability of the tax-base, which is itself declining in the PIGS on account of the austerity being dumped on them from on high, by Herr Schauble and one day the elastic has got to snap.
The longer before the inevitable split the messier it will be, and if the split is disorderly, driven by the markets, it will be much, much worse, resulting in widespread dislocation for Europe, that will have negative global implications. Then all the bail-outs and ECB cheap LTRO loans will be seen to have been wasted and adding to the inevitable losses of the break-up.
There is only one way for the eurozone to be saved, as the CESifo data shows, and that is for Germany to step up and pay for the gain it has got from the eurozone by equivalent transfers to the PIGS.
That is the cost of a monetary union for the winners. Take the UK as an example: England subsidises the Celtic fringe with massive transfers, particularly to Scotland. If that bloated lump of Icelandic codswallop called Alex Salmond gets his Independence Day, then the Soviet socialist Republik of Skotland will become an economic black hole, allowing the English to retreat and sing hallelujahs in their grateful independence and new-found riches. It always pays to be cautious about what you want – just ask the PIGS.
When EMU was in the planning, West Germany was intent on being the good eastern neighbour, but with reunification and its massive costs, the name of the game changed. The political will behind EMU to make it work, latterly epitomised by Kohl and Mitterand, was intense: the French wanted to get their screwdriver onto German interest rates and policy and the Germans wanted to bury their murderous past and be pinned down in the New Europe with golden shackles. But the wind of change blows through the Brandenburg Gates, as ever, and now the reunified Germany is emerging as the dominant economic force across Europe.
Old ‘Champagne Charlie’, Von Ribbentrop, the one who planned to swamp and control Europe with Hitler’s Reichsmark, must be singing in his grave, now that the German spanner in the shape of the euro has well and truly tightened the economic pipes of wider Europe, and is forcing the lesser economies into a debt-deflationary wipe-out. All eyes are now on France, which is beginning to doubt the eurozone, and its own presidential elections: Sarko out, and the euro loses another brain-free prop.