The Corner

Contemplating the End

In the Financial Times, no less, Gideon Rachman writes:

I do think that it would ultimately be better if the eurozone broke up. This might not involve a complete reversion to national currencies. A hard core of euro-users, centred on Germany, might survive. But the current euro will have to go.

That sounds a lot like our old friend, the Northern Euro.

Rachman continues:

It is true that the transition from here to there will be painful and dangerous. My colleague Martin Wolf laid out an updated version of the full horror scenario in Friday’s FT – involving a breakdown of law and order in Greece, and financial collapse across Europe.

The Wolf article is well worth reading. Reasonably enough, it’s absolutely terrifying.. As to the breakdown in law and order, I received this comment in an email from a Greek friend last night:

The crisis in Greece is a social crisis. We are seeing the breakdown of social order.

Under the circumstances, Rachman asks himself how could he think that it would be better if the euro zone broke up?

The answer is that the alternatives to eurozone break-up are inherently implausible and deeply unattractive. At the weekend G8 leaders called for Greece to stay in the eurozone. Their present plan seems to involve some magical mix of stimulus and austerity that restores both budgetary balance and growth. But even if they can agree a real plan and even if it works – and neither outcome is likely – the eurozone’s structural problems would remain.

Without the option of devaluing their currencies, uncompetitive economies are left with “internal devaluation” – otherwise known as wage cuts and mass unemployment. It is true that countries such as Greece badly need economic reforms. But these reforms – conducted within the straitjacket of monetary union with Germany – are causing political and economic turmoil.

Quite, and then he throws this rebuttal in the faces of those (Cameron, Obama and the rest) who so glibly argue for the closer fiscal union that would have economic logic (of a sort) behind it, but, lacking genuine  popular consent, no political legitimacy:

Even if EU politicians were able to overcome such objections and create a real federal union, this giant new entity would essentially hollow out the powers of national democracies. Sacrificing national self-rule on the altar of the euro is inherently objectionable – and would invite a nationalist backlash across Europe. This “cure” for the ills of the euro would be worse than the disease.

And then Rachman turns his attention to the mechanics of break-up. He accepts the reality that contagion would spread (It would, via, I’d guess by a succession of bank runs that would be (in effect) really be runs on countries rather than the banks within them) and is skeptical that the firewalls would hold (I’m not quite so sure), concluding as follows:

Allowing the fate of the euro to be driven by a succession of market panics would be the worst possible way of breaking up the single currency. It would involve the loss of billions of euros of public money as the EU burnt through its firewall. The political and economic turmoil that followed would cause public panic and discredit the politicians in charge.

It would be infinitely preferable if EU leaders were to make a rational assessment of which countries are willing and able to stay in the euro – and announce plans to work on an amicable and orderly divorce between the stayers and the goers. Only by acting in this way might they finally achieve their oft-stated goal of “getting ahead of events”. Almost all euro-users adopted the currency without a referendum, and they could leave the same way.

It is true that even a “velvet divorce” for the eurozone would involve enormous dangers. But at least it would offer a believable exit from the present maze. As a (very) German proverb puts it – “Better an end with horror, than a horror without end.”

Powerful stuff. And, as I said, published in the deeply Europhile Financial Times. Attention must be paid.


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