A-modest-proposal-for-eurozone-break-up … The eurozone can in theory still be saved, if two sets of conditions are fulfilled; if the leaders of Germany, Austria, Finland and the Netherlands accept fiscal union and a common pooling of debt, and can persuade their parliaments and courts to ratify such a revolution. Germany and its satellite economies could withdraw from EMU, leaving the Greco-Latin bloc with the residual euro and the institutions of monetary union. – UK Telegraph/Ambrose Evans-Pritchard
Dominant Social Theme: One way or another the Eurozone should survive. It's good, yes it is – and a good thing.
Free-Market Analysis: Ambrose Evans-Pritchard, back now, is off to a blazing start. He's taking on the world, and yesterday he solved Europe. (See above.)
Tongue-in-cheek, Evans-Pritchard has decided that Europe ought to be split into TWO currency zones – a Germanic one and a French one. He also believes the European Central Bank is trying to do too much and that it ought to switch from inflation fighting to job-targeting. The idea is that Europe needs jobs and that the ECB ought to embark on a "Fed-style stimulus for three to five years."
Evans-Pritchard cleverly intimates that such a policy might create "jobs" – but more importantly, it might allow Spain to recover somewhat. That's because whatever quantitative easing does or doesn't do, it certainly raises the rate of inflation. And that might help Spain "work off a total debt load now topping 300pc of GDP."
He also foresees that such a policy would ignite serious price inflation in Germany. "I strongly doubt that the Bundestag, Tweede Kamer, or Finland's Eduskunta will accept such conditions." Right he is. "Why should they?" he asks. Germans received very clear assurances before entering the EU. They were NOT to be responsible for the debts of others …
Germany's Social Christian leader Edmund Stoiber japed after Maastricht that a future German rescue of any EMU state was as likely as "famine in Bavaria". Given that these sovereign diets will not efface themselves lightly, the wise course is to prepare for an orderly break-up of monetary union.
And how would that come about? Only one option can be orderly, in his opinion. "Germany and its satellite economies must withdraw from EMU, leaving the Greco-Latin bloc with the residual euro and the institutions of monetary union."
He even has a name in mind: the "Latin Union." He foresees that the Latin euro would decline sharply against all major currencies including the new Teutonic Mark; this devaluation would let the Greco-Latin bloc resolve their debt issues, just as devaluation always has in the past. The trouble with the current union is that devaluation is not possible. Here's some more:
The IMF should stand ready with flexible credit lines to tide Latins through the first weeks of this rupture. Once the dust had settled, it would become clear that Italy, Spain, Ireland, and perhaps Portugal had regained enough competitiveness to hope to grow their way out of debt traps. Fear of domino defaults would recede.
The alternative is to impose austerity and debt deflation without offsetting relief – à la grecque – on a string of countries until their polities shatter, and capital flight sets off disorderly EMU exit by the weaker states, with a concomitant chain of defaults reaching Italy, the world's third biggest debtor.
As the bond jitters of the last two weeks have shown, we are already uncomfortably close to this. France is of course a stumbling bloc. The country is not a hopeless case within EMU, though deteriorating trade and debt figures are slowly eating away at French viability as well. The Élysée would view any separation from Germany as a catastrophe. Yet this is surely outdated thinking in the 21st Century.
As for Germany … well, Germany has come of age and can hold its own with America and China. France should be content with its new role as "leader of a Latin Union with 220m people and over 60pc of the eurozone's GDP, with economic sway over North Africa. The ECB headquarters could transfer to Marseilles, that great millennial hub of civilization, to be renamed the Mediterranean Central Bank."
Excuse us for snickering. The idea that the bumptious Nicolas Sarkozy would settle for being the leader of a "Latin Union" is unrealistic – and the author of this modest proposal knows it. Nonetheless, enamored of this newly fictionalized world, he plunges on.
Ireland should remove itself entirely from the Eurozone and relaunch its own currency. Meanwhile, the new Latin currency might fall to $0.65 against the dollar; the German-backed euro meanwhile would rise to perhaps $1.83. If France is part of it, the Latin drop might only be 30 percent.
The alternative to such an orderly withdrawal is a frightening one in Evans-Pritchard's view. The result would be worse than Lehman's failure. "A euro-Lehman would be worse because there is no Washington in Europe and creditors have in the meantime lost a degree of confidence in sovereign states themselves. It would instantly embroil London and New York through multiple channels."
An orderly unraveling on the other hand, "might prove less traumatic than assumed." He quotes Czech premier Vaclav Klaus as saying that it is surprisingly easy to end a currency union: the Czechs and Slovaks did it calmly in a morning.
There would be other benefits. Stripped of its pretensions, the EU would function more like a free-market and less like a wannabe Soviet Union, piling law upon law with no accountability. The Schengen system of open borders was always part of what was best about the EU and that could be retained.
But he doesn't really believe any of it. "Unfortunately, most of Europe's governing elite is ideologically compromised by the Project and will attempt to defend an unreformed EMU with scorched earth policies. We can only hope that the less compromised judges of Germany's Verfassungsgericht bring matters to a swift head in September."
What he's referring to here is the verdict that German judges are going to reach on the bailout that has already taken place. While they may not find what has already taken place to be unconstitutional, they could well set a framework forbidding further such activities. That would surely undo the euro and be a major blow to Angela Merkel's globaist supporting agenda.
Of course, if the Eurocrats keep up the current reality-denying summits and bailouts, the euro may simply disappear on its own, the victim of technical bankruptcies in Spain, Greece, Portugal, etc. Sarkozy has been especially intransigent about all of this but he should take care: France may itself find itself in the same situation as Greece at some point. It is a bigger economy than most but not better run. Will it take kindly to orders from Germany?
EU members are supposedly meeting again on July 21st to try to resolve further sovereign debt problems … once again. Germany's Angela Merkel has said she will not arrive if the deal isn't ready. Meanwhile, the contagion continues to spread and has affected both Italian and French bonds now. Given the level of unreality that Eurocrats continue to exhibit, it is perfectly possible that yet another "resolution" shall be announced – only to prove as fleeting as previous ones.
Eventually, Spain, Portugal, Greece and even Ireland shall likely be declared in default in some manner. Almost anything that Eurocrats want to do, even lengthening maturities on some bonds that are due, will be perceived by rating agencies as a technical default. And if nothing is done, defaults will occur anyway. At that point, the euro might plunge dramatically and the unraveling of the EU begin in earnest.
It is this uncontrollable meltdown that Evans-Pritchard means to warn against; though in the meantime traders are availing themselves of fat profits due to all the volatility. Jonathan Swift's "modest proposal" did not solve the Irish famine and this version will probably do no better.