In our articles, “The Euro: Never say die?” of 8th August and, “The Euro: On course for disaster” of 20th May, this organ was derelict in failing to address a possible scenario. This was the scenario seemed so far fetched as to be unworthy of serious discussion.
We have however, in the light of ongoing developments – the seeming inadequacy of the responses by the few solvent members of the Eurozone – reassessed the situation and have come to a remarkable conclusion: that it will be Germany that will leave the Eurozone and not the PIGS.
It is difficult to overstate the consequences of such an action. As briefly and inadequately mentioned in our May article, the consequences of any member state leaving the Eurozone – that is giving up the Euro and readopting their own currency – is that it also finds itself outside the European Union.
Were Germany to quit the Eurozone the European Union itself would collapse. Of that there can be no doubt. The timing of the collapse would be rapid and the economic and the political consequences would be severe.
The British Gazette is choosing its words carefully.
Before proceeding further one must address the question that will be uppermost in many reader’s minds: Why would Germany do such a thing? When the effects of the action are certain – shades of Samson bringing down the temple.
It is because the alternative would appear to be worse.
Let us answer the question: What has got to happen to ensure the survival of the Euro? The answer is rather simple. Expensive, certainly. Unpopular, most assuredly. It is that all government paper in the 17 member Eurozone states must be exchanged Pari passu (on an equal footing) with paper issued by the European Central Bank and underwritten with full joint and several liability by all these members.
Let us be absolutely clear on this: we have now reached the stage where this is the only plan with the words: To save the Euro on it. There is no Plan B. To make Plan A work, all competences in tax raising and budgeting must be surrendered to the European Commission as a sole competence. Setting one’s own taxes and deciding on how much to spend and how much to borrow would be a thing of the past for these member states. They would in effect be reduced to the status of provinces.
Of course these monumental debts incurred by the PIGS will have to be serviced. The PIGS do not have the money and therefore the money will be paid by the citizens of the members states by a combination of tax rises and public spending cuts. Because the tax rises and spending cuts will be severe, so too will be the reaction amongst Europe’s voters.
If this was done and the tax hikes and spending cuts were of a level to indicate to the markets that the EU was serious and able to service and cut its deficit, then the interest rates on that debt would drop – dramatically.
This is of course why Angela Merkel is dithering and playing for time. Frau Merkel is desperately adopting the Micawber strategy – something will turn up. The trouble is, it won’t. As a policy Frau Merkel’s Micawber strategy has the same chances of success as a feckless, foolish and impecunious fellow who sees the solution to his problem – lack of money – as buying a Lottery ticket. All British Gazette readers would give counsel to this fellow along the lines of; “That is hopeless. Get a job.”
Frau Merkel’s problem is that the longer she leaves it the greater the risk of the markets intervening and deciding the matter brutally.
Frau Merkel’s problem is that the debts of the PIGS are so huge that when combined with their own debts it is going to reduce living standards for a generation. The problem is that putting this policy into practice will be horrendously difficult and unpopular. Expect to see troops – and not just Greek troops on the streets of Athens. Expect riots. Expect terrorism.
We said that there was no viable Plan B. So far as saving the Euro is concerned that is the case. That does not mean that there are no other choices open to the Germans. Were the Germans to adopt this strategy the PIGS would become bankrupt – overnight. This would cause many of the banks that have lent money to the PIGS and other states to become insolvent. Germany would of course have to rescue her own banks. This would be expensive – but cheaper than keeping the Euro in existence.
The European Union would still exist if Germany left but is would not last long. A matter of weeks – and not many weeks. After this many of the newer the former member states in east and south east Europe would become unstable and their democratic systems are likely to fail with coalitions declaring states of emergencies and/or juntas taking over. This could occur in countries such as France and Italy.
The advantage for Plan B (Don’t save the Euro) is that it is doable and cheaper. It is possible that in adopting Plan A (Save the Euro) the plan might fail – that the taxes and the cuts cannot be enforced across the Eurozone. In that case the PIGS and the others will drag Germany down with them. It is to avoid this strong possibility that the Germans might choose to go it alone.