Peter Spengler has drawn my attention to a good analyst.
Malmgren's
point is that Germany is commited to price stability asnd therefore cannot
accept a carte blanche to printing money for the euro's souther periphery. She
claims the euro may die but only to return more realistic and
stronger.
Arno
http://www.pippamalmgren.com/80.html
This commentary was submitted on the 19th of October in response to the Eurasia Group CEO Ian Bremmer's article in the FT entitled "Germany will never leave the Eurozone". The article can be found here.
I respect Ian's opinion but he does not capture the issue that is forcing Germany's hand. They increasingly fear having to choose between permanent price instability and temporary currency appreciation. What Germany cannot do is accept monetization of the debt. The social contract between Germany's citizens and its leaders preclude this option given their history.
If the ECB under the new leadership of Mario Draghi buys so-called PIG
bonds or attempts to print money,
Germany will feel it has a central bank that has no "rules" and which
simply serves as a blank check to the
other member states. This means permanent price instability. If the ECB refuses to monetize the debt and no
other white knight can be found (the IMF cannot fill the hole, Germany and China
won't fill the hole, Tim Geithner would love to but the American public won't
permit it, and the idea that the G20 can do it provokes howls of laughter from
G20 government officials), then multiple sovereign defaults will occur well beyond Greece.
The Greek default will continue with new haircuts leaving investors lucky
to get 20 cents on the Euro. That would mean a substantial fall in the Euro and no possibility of
recovery until the last element of default was done. That will feel like
permanent price instability to the Germans.
Either way, Germany will find itself
hostage just as a skilled and prepared mountainclimber might find
himself fully locked onto the mountainside but his colleagues are dangling in
the wind. National interest will demand self
preservation no matter how much Germany might like to keep the
climbing team together. They don't want to cut the rope but they may be
forced to.
A return to the Deutschemark will not mark the end of Europe, the European Union
or the effort to enhance integration. Instead, Germany has already begun
to emphasize the need for a new EU Treaty that would compel fiscal
harmonization, penalties for those that break the Maastricht Treaty rules
and other undertakings that would harden Europe's defenses against economic
default risks going forward. 100 years from now the Euro will be a trick
question on a history test, given that it only survived for 12 years. How many
people in the market today even remember an earlier version of the Euro which
was called the Ecu? The FT should start a competition to name the new "Euro"
that will have more substance behind it.
For those who argue that the
Germans will never survive the massive appreciation of the DMark, should they
decide to go down that road, they forget that throughout history the Germans have usually got an appreciated
currency and almost never compete on price anyway. They compete on quality. And, is there really a
European export market that would be sacrificed? It's hard to imagine many
Greeks or Italians buying Mercedes in the next few years.
The European project will move forward much more robustly
once everyone finally realizes that the Euro in its current format is
unworkable. Nothing stops Europe from moving forward other than public
opinion. The fact is that Germany's social
contract is very different from the social contract between the
citizens and the state in any of the peripheral countries. What is required
to satisfy Germany brings riots in southern capitals. What is required in
Southern capitals breaks the social contract in Germany. The failure of the
Euro will bring this conflict into sharper focus and set the stage for new
commitments to create a Europe that can satisfy the needs of the members without
destroying civil society in Europe