Eurozone crisis : Latin euro or German rescue ?
23 July 2012
The Daily Telegraph, Handelsblatt
“The financial credibility of Spain is close to zero,” writes Ambrose Evans Pritchard in the Daily Telegraph –
Fiscal credibility is zero. Political credibility is zero. The new government of Mariano Rajoy has squandered the advantages of its absolute majority in a matter of months, and completely lost the confidence of Europe's institutions.
The Telegraph’s International business editor pulls not punches, blaming “Europe’s incompetent policy elite” and its “scorched-earth monetary, fiscal, and regulatory policies.” Reserving particular ire for the European Central Bank, he argues that –
It is time for Spain and the victim states to seize the initiative. They cannot force Germany, Holland, Finland, and Austria to swallow eurobonds, debt-pooling and fiscal union, and nor should they try since such a move implies the evisceration of their own democracies.
What they can to do is use their majority votes on the ECB's Governing Council to force a change in monetary policy. Germany has two votes out of 23, with a hardcore of seven or eight at most. The Greco-Latin bloc can force a showdown. If Germany storms out of monetary union in protest, that would be an excellent solution.
The Latins would keep the euro – until the storm had passed – allowing them to uphold their euro debt contracts. There would be less risk of sovereign defaults since these countries would enjoy a pro-growth shock from monetary stimulus and a weaker Latin euro against the Chinese yuan, the D-Mark, and the Guilder.
This option is of no interest for Germany, writes the chief economist of the German business daily Handelsblatt. In an article entitled “Like a second reunification”, he recommends that critics of the government’s bailout policy read the latest reports by the German Council of Economic experts and the rating agency Moody’s –
Both show unequivocally that the end of the euro would be much more expensive for Germany than many think.
The Council experts estimate the amount of credit Germany has extended to its euro partners is €2.8 trillion. In the case of a break up of the single currency they expect an “uncertainty shock” which would slow the economy down by 5%, plus a long term slowdown in exports following the revaluation by about 30% or more for the new Deutschmark.
Moody’s estimate is lower – €1.9 trillion (the price of the German reunification) – and leads Handelsblatt to the conclusion that Berlin has no alternative but to push for completion of monetary union. The government must honestly explain –
... how much each way out of the euro crisis would cost compared to a euro exit. It should explain to citizens that solidarity with our partners is necessary, and in exchange we would get the chance of establishing a competitive Europe that corresponds to a great extent with our ideas.