Monday, August 15, 2016

Ambrose Evans-Pritchard: Should Germany bail out Club Med or leave euro itself?

January 31, 2010 by · Leave a Comment 

By Ambrose Evans-Pritchard, The Telegraph

Germany faces a terrible dilemma. Either Europe’s paymaster agrees to underwrite a Greek bailout and drops its vehement opposition to a de facto EU economic government, treasury, and debt union, or the euro will start to unravel, and with it Germany’s strategic investment in the post-war order.

The spike in yields on 10-year Greek bonds to 400 basis points above German Bunds has been shockingly swift — a warning to Britain too that markets can suddenly strike any country that takes creditors for granted.

We can argue over whether Greece, Portugal, or Spain are at risk of being forced out of the euro. But there is another nagging question: whether events will cause Germany and its satellites to withdraw, bequeathing the legal carcass of EMU to the Club Med bloc.

This is the only breakup scenario that makes much sense. A German exit would allow Club Med to uphold contracts in euros and devalue with least havoc to internal debt markets. The German bloc would enjoy a windfall gain. The D-Mark II would be stronger. Borrowing costs would fall. The North-South gap in competitiveness could be bridged with less disruption for both sides.

To be sure, Germany is happily placed in the current EMU system. By compressing wages for a decade it has stolen a march on EMU. Critics unfairly call this a beggar-thy-neighbour policy. It is simply the way Lutheran society operates, in deep contrast to the way Latin society operates — a cultural clash that should have given pause for thought before Europe’s elites launched headlong into their adventure.

German goods are flooding the South. In the 12 months to November, Germany-Benelux had a current account surplus of $211 billion: Spain had a deficit of $82 billion, Italy $74 billion, France $57 billion, and Greece $37 billion. German industry will not give up this edge lightly. However, the matter will in the end be decided by democracy. German citizens were given a pledge by their leaders in the 1990s that loss of the D-Mark would not lead to monetary disorder, or leave them liable for Club Med debt. That is the sacred contract of EMU.

“Politically,” said Bundesbank chief Axel Weber, “it’s not possible to tell voters that they are bailing out another country so that it can avoid painful austerity measures that they themselves have gone through. Such aid, whether conditional, or — even worse — unconditional, is counterproductive.”

Dr Weber is right on both counts. Fresh loans for Greece can achieve nothing useful at this stage. Greece already has a public debt hurtling towards 138 percent of GDP by 2012 (Standard & Poor’s). It is already in a debt compound spiral. The EU elites have yet to acknowledge that Greece and much of Club Med need gifts — not loans — akin to transfers paid to East Germany after unification, or North Italian perma-subsidies to the Mezzogiorno.

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