Anatole Kaletsky From: The Australian
September 16, 2011 12:00AM
A Greek euro coin sits on a stack of euro coins in Athens. Source: Bloomberg
IF Germany's Bundesbank fails to get its way on European bailouts, the impossible may become the inevitable.
In financial crises, events can move from impossible to inevitable without ever passing through improbable.
This is something I have been repeating since the near-collapse of every leading bank in the world that began with the bankruptcy of Lehman Brothers, the third anniversary of which was yesterday.
The eye of the hurricane has moved to Europe, but its course is as unpredictable as ever:
Three outcomes face Europe.
One seems inevitable: continuing chaos.
One appears improbable, although it must be seriously considered: a break-up of the euro caused by government defaults and bank failures in Greece.
And one fantastical scenario is still generally deemed impossible: Germany's withdrawal from the eurozone.
Related Coverage
- Fresh turmoil for Eurozone The Australian, 5 days ago
- Germany nominates Stark successor Adelaide Now, 5 days ago
- Stark quits ECB in protest The Australian, 6 days ago
- Judgment looms on EU bailouts The Australian, 10 days ago
- A miracle that masks a mirage The Australian, 31 Aug 2011
The basic contradiction between one currency and a multiplicity of divergent national economic policies is now universally accepted, and financial normality cannot return until it is resolved by turning the eurozone into a tighter fiscal and political union.
But such a huge leap cannot occur for at least 18 to 24 months. Two institutions are needed: a European finance ministry with veto authority over national tax and spending policies; and the legal instruments for issuing jointly guaranteed bonds.
The trouble is that this timetable is inconsistent with any hope of restoring financial stability, at least before the end of next year.
Financial markets work on a time scale of months and weeks, not years, and the timetable difference almost guarantees a continuing series of financial crises.
Political progress comes to a standstill whenever the mood of financial crisis subsides.
Which brings us to an outcome that remains fairly improbable, but must be taken very seriously. This is a break-up of the euro after the expulsion of its weakest members, starting with Greece.
If Greece were expelled, a break-up of the single currency would follow an almost inexorable logic. Suppose Greece transformed all its bank balances from euros into drachmas and devalued them by half overnight. Citizens of Portugal, the next weakest country, would immediately anticipate similar losses and shift all their savings to German or Swiss banks.
Portuguese banks would close their doors, and even the financial power of the European Central Bank might be insufficient to prevent bank runs spreading to Spain, Italy and France.
At that point, only the promise of the German government to do whatever it takes would stand in the way of a break-up of the euro.
But what if Germany's leading politicians and businessmen, currently still united in their pro-European instincts, were challenged by some other equally powerful German institution?
This brings me to the seemingly impossible scenario that could suddenly be inevitable.
It may turn out that the key to the euro's future will be Germany's voluntary withdrawal.
This fantastical idea could gain credibility for two reasons.
First, a German exit would be much less disruptive than a Greek expulsion, because it would not trigger bank runs in countries remaining within the single currency, all of which would automatically devalue against Germany at the same moment. If Germany left, The Netherlands and Austria would follow, but the other countries could remain in a French-led single currency that would be drastically devalued.
Second, and more importantly, deep splits over the euro have begun to emerge among the German political and financial elites. This mention of elites is deliberate because the German people have always been unhappy about the euro, but popular pressure alone would never be enough to break the integrationist instincts of the main political parties, especially when coupled with the interests of German exporters, for whom the euro has been a boon. In the past few weeks, however, a new power has appeared: the Bundesbank.
The most dangerous event of the summer for the euro was the resignation last Friday of the German appointee to the ECB council and the former vice-president of the Bundesbank, Jurgen Stark.
If the ECB has to engage in an even bigger support operation for Italy and Spain, Bundesbank president Jens Weidmann has suggested he would vote against, and if he were outvoted and resigned, it would be hard for the Bundesbank to remain on the ECB board. Given the faith in the Bundesbank, the seemingly impossible could become inevitable.
The Times
In Europe, the impossible may become the inevitable | The Australian
