STAFF NEWS & ANALYSIS
Germany's Precarious Predicament: Continue to Stand on the EU Gallows or Walk Away
By - February 24, 2009

If Der Spiegel is correct, the German finance ministry is drafting rescue plans to prevent default on the edges of the eurozone leading to a full-blown collapse of Europe's monetary system. This is an entirely appropriate policy in economic terms. One dreads to think what would happen if the world's twin reserve currency were to disintegrate at this stage. But what about the solemn pledge to voters by Germany's political elites – promiscuously given over the years – that monetary union would never leave them on the hook for the debts of half Europe? The vast imbalances that have been allowed to build up under the seductive protection of EMU leave German taxpayers facing bail-out liabilities that exceed the cost of reparations after the First World War, in proportional terms. The political ground has not been prepared for this. EMU was foisted on the German people without a referendum, in the face of deep public scepticism and scathing criticisms by the professoriat. This failure to secure a mandate for such a revolutionary undertaking is coming back to haunt them. Berlin is at last having to deliver on the Faustian bargain made by Germany's political class when it swapped the D-Mark for French acquiescence in reunification. It must either go the whole way towards EMU fiscal union and take responsibility for Italy's public debt (111% of GDP by next year), Austria's loans to Eastern Europe (70% of GDP), the adventures of Ireland's 'Canary Dwarf' (€400 billion or so in liabilities), and Spain's housing collapse (1 million unsold homes), or jeopardize its half-century investment in the political order of post-war Europe. Letting EMU fail at this stage would have far higher costs than never having launched the project in the first place. – UK Telegraph

Dominant Social Theme: Let the bailouts begin. The EU will not fail!

Free-Market Analysis: Very interesting. So the Germans are beginning to be faced with a real choice, it seems, one that may determine the fate of the European Union. It did not begin with the rejection of the EU Constitution, or even with the Irish apostasy. It begins, as it began before, with Deutschland itself. Yet there are bigger issues at play, even than this. The article points out toward the end:

But whatever the legal theory, the political reality is that 700,000 Germans are going to lose their jobs this year as unemployment rises to 4.3 million (IFO Institute). Voters are not going to look kindly on any party seen to divert German savings to Ireland or Club Med. Architects of EMU were well aware that a one-size-fits-all monetary policy for vastly disparate nations would create serious tensions over time. They gambled that this would work to their advantage. The EU would be forced to create new machinery to safeguard its investment in the euro. It would be a "beneficial crisis", bringing about the great leap forward to full union. We are about to find out if they were right.

This is the truly cynical game! The socialists of the EU who have conducted a tricky strategy for at least 50 years – since the inception of this ever-expanding empire-in-the-making – were aware of course that there would be a real crisis someday, and that the EU was NOT set up for it. The outcome? The EU was to be jolted by the financial crisis into true nationhood.

The arrogance and certainty of the monetary elite is breathtaking. "The EU would be forced to create new machinery to safeguard its investment in the euro. It would be a ‘beneficial crisis', bringing about the great leap forward to full union." European nation-states are to panic and hand over all national power to the EU. Lord, are they dreaming? If Iceland was to be a test case, they may be.

Iceland at least had the luxury of letting banks default – shifting losses on to the rest of the world. It refused to honour foreign debts. "They drew a line," said Jerry Rawcliffe, who tracks Iceland for Fitch Ratings. "They created new banks, parking the old losses in resolution committees. It is not easy for other governments to walk away. They have a duty of care." (Telegraph) Indeed. What is to stop other smaller countries, the ones most at risk, from "walking away" as Iceland did? The only three that almost surely cannot (due to the international aspects of their economies) are Britain, France and Germany.

Still, walking away is not the same as providing a bail-out. The Germans will obviously be harassed to provide financing for EU's failing states, great and small. Effectively, Ireland, Italy, even Spain, could be nationalized by the Germans. But such nationalization implies leadership. Money has its own logic. It demands some level of acquiescence. Thus Europe, some 50 years later, faces German domination by economic rather than military means. The only trouble with this scenario is that Germans – or that country's long-suffering middle class, anyway – may well not play along. (They may remember it didn't work out so well last time.)

Poor Germans, they have been through a lot. Do they really want to take on the de facto responsibilities of running an empire? Do they want to deal with the Basques, the Irish and the Italians all at once? There has never been any sort of buy-in for this rag-tag reclamation of Charlemagne's vision. In fact, within the past years, when it has become obvious that the quarreling tribes of Europe will only go so far before their own survival instincts kick in, the leadership has tried to push along the EU by all sorts of subterfuge. Their plans have fattened corruption and played out to great sound and fury, but the result ultimately has been far short of success.

Driven by the doctrinaire socialists of the political class and stoked, to begin with, by the wealthiest and greediest families of Europe and Britain, the current incarnation of the EU remains dysfunctional in the extreme. It is certainly not likely that the current EU leadership can rescue the union if the economy continues to unravel. Some other group, country, entity, will have to step up to the plate. The only logical candidate, as the article points out, is Germany.

After Thoughts

OK, two potential solutions and neither especially likely. Too early to predict the demise of this entity, but there will certainly come a time if conditions continue to unravel. There is another option as we have pointed out. Devolution and the re-establishment of a gold standard that would at once satisfy nation states' desire to control their own destiny while flexibly creating a monetary arrangement that functioned well more than a century ago. It is a measure of the intellectual dishonesty of those who control the EU that such a solution is neither discussed nor considered.

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