Angela Merkel, the German Chancellor
Angela Merkel told German industry today that we are not facing "a euro crisis, but a debt crisis."
She is wrong. Total levels of private and sovereign debt in the eurozone are lower than in the UK, the US, and far lower than in Japan.
Greece’s debt levels are around 250pc of GDP, at the lower end of the developed world.
Spain’s sovereign debt is admirably modest at around 65pc. Italy’s household debt level is the envy of the rich world. It has a primary budget surplus. Italy has many problems, but the budget deficit is not one of them.
So why is there such a destructive and long-festering crisis in the eurozone? Why have three countries required an EU-IMF bail-out? Why is the ECB having to shore the debt markets of five countries — soon to be six — with direct bond purchases, including Spain and Italy?
Not because of debt, except in the most superficial sense.
The reason this crisis keeps grinding ever deeper is because the euro itself is a machine for perpetual destruction. The currency is fundamentally warped and misaligned.
It spans a 30pc gap in competitiveness between North and South. Intra-EMU current account deficits have become vast, chronic, and corrosive. Monetary Union is inherently poisonous.
The countries in trouble no longer have the policy tools — interest rates, QE, liquidity, and exchange rates — to lift themselves out of debt-deflation.
Just as they had few tools to prevent a catastrophic credit bubble during the boom. Their travails were caused in great part by negative real interest rates set by the ECB (irresponsibly) for German needs.
Their fiscal deficits (and remember, Spain and Ireland ran big surpluses in the boom) have exploded because of the Great Recession itself — as they have in the UK, US, and Japan.
Draconian fiscal tightening might be manageable for these countries if the Teutonic bloc is willing to offset the contraction in demand by cranking up their own stimulus, allowing the intra-EMU imbalances to close from both ends. But the Teutons instead cling to their pieties, and their morality tale. The result is the downward spiral that we can all see.
Germany imposes austerity alone, seemingly convinced that there are good imbalances (German trade surpluses) and bad imbalances (Club Med trade deficits). Well sorry, Frau Merkel, this is intellectually childish. Both imbalances are equally bad. Booth sides are equally "guilty", to borrow your morality language.
As I have written many times, this austerity fetishism repeats the fatal error of the 1930s Gold Standard when surplus states (France and the US then) failed to recycle their gold hoard and instead imposed the full burden of adjustment on the deficit countries — until these countries broke free and inflicted condign revenge.
Larry Hatheway and Stephane Deo at UBS have just issued a sequel to their report warning of violence or civil war if the eurozone crisis leads to break-up. They take Berlin to task for its primitive policy prescriptions.
"We believe the Eurozone sovereign debt crisis has entered a more dangerous phase. The main reason the Eurozone has been incapable of addressing its long-running sovereign debt crisis satisfactorily is because leaders have framed an in appropriate agenda. Focused on the need for harsh and widespread fiscal austerity, policy makers have lost sight of the underlying cause of the crisis."
"That comprises the absence of institutions to manage the ‘imbalances’ problem between creditors and debtors within the monetary union, and the systemic flaws in the Eurozone’s financial and banking system, exposed by the 2008/09 financial crisis.
"Obsession with fiscal austerity to the exclusion of all else is not credible in an environment of weakening growth in Europe’s core and recession in the periphery. The immediate problem, which policy makers have been unable or unwilling to address successfully, is the negative feedback loop between diminishing sovereign credit worthiness and weak, undercapitalized banks. Improving sovereign credit though austerity is a long process, and, in any case, hard to pull off in recessionary conditions and when all one’s major economic partners are also in austerity mode. The weakest link, Greece, is now in a debt trap, which threatens to engulf other nations."
Yes, bail-out machinery is also needed:
"A robust commitment to substantial bond purchases by the ECB and bank recapitalization are the most important and urgent tools to break the vicious circle of deteriorating creditworthiness between sovereigns and banks.
"Without these steps, we believe the lurch from crisis to worsening crisis won’t stop. But the crisis is also one of growth."
UBS is right about this.
They are however completely wrong to keep arguing that a eurozone break-up would be catastrophic, nixing 20pc to 40pc of GDP in a year and leading to social carnage. That is a variant of the scare story now being propagated by the euro-elites.
The reality is the opposite. It is the existing status quo that risks bringing about the economic depression, social collapse, street populism, nationalistic backlash, cross-border hatred, and the violence so feared by the bank.
EMU should not be saved. It should be broken in two, or dismantled, in an orderly fashion of course.
If the authorities can hold together 17 countries in EMU, they are surely capable of holding together a Teutonic Union and a Latin Union — each reduced to a more manageable fit and each more viable.
They are surely capable too of fixing the exchange rates of the two blocs, with a 25pc to 30pc devaluation for the Latin tier. This rate could be held long enough to stabilize the system and nurse the South back to health. If this was managed with an ounce of common sense and a firm hand, the apocalyptic outcomes so much in vogue could easily be avoided.
The risk is that EU leaders will not entertain such blasphemous thoughts, and will not prepare the ground for any coherent solution at all.
Dr Merkel, what we have is the crisis of a foolish monetary union that ought to be shut down but is being kep alive because the priesthood has endowed it with sacred significance. Let stop this abvsurd quasi-religious charade. The euro is nothing but a currency. It has no intrinsic importance. None.
To claim that Europe fails if the euro fails is hollow rhetoric. The great democracies of Europe will march on serenely.
