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Germany Must Pay Through The Nose

It is more and more clear that Europe has no good choices left.  The only thing more expensive than bailing out the eurozone’s PIIGS might be to let the eurozone go. The Economist explains why:

If Germany were to leave, its Neue Deutschmark would soar as international funk money piled into a bigger, better Switzerland, and German manufacturing firms would suffer. German banks could cope with the switch of domestic deposits and loans into the new currency, but they would have to be recapitalised because their foreign assets in euros would now be worth less in domestic terms.

If Greece were to leave, its reborn drachma would plummet—which might be good for its exporters but which would trigger what Barry Eichengreen, a monetary historian at the University of California, Berkeley, has called “the mother of all financial crises”. The devaluation of the drachma against the euro would turn any debts that remained in euros into a crippling burden. At the same time depositors, who are already edging towards the exit, would break into a headlong rush, bringing down Greece’s banking system.

There is more, lots more.  Greek banks wouldn’t be the only ones experiencing runs.  Any country with the slightest chance of being caught in the maelstrom and leaving the euro would immediately suffer an apocalyptic bank run.  This wouldn’t just include Ireland, Portugal, Spain, Cyprus and Italy; Belgium and quite likely France would also see bank runs.  It would be a no brainer to park your money in Germany or another ‘strong’ country while waiting to see what happened at home.

Northern governments may only now be waking up to the deep cynicism with which some southern governments are approaching the crisis.  Neither the Greeks nor the Italians have anything but moral contempt for German and Nordic financial puritanism.  They see the northern banks (and bank regulators) as equally to blame for the crisis, and they have in no way lost their national egoism.  They are debating in European forums today with the same nationalist selfishness that their predecessors did 150 years ago.  They will play every card in their hands — and the fact that an Italian collapse certainly and a Greek collapse quite probably would wreck the whole European economy gives them quite a few cards.

The Germans in fact have been thoroughly hornswoggled and despite all their humping and grumping, they are going to pay through the nose.  They can pay in the form of massive bailouts and subsidies as long as southern Europeans want northern money, or they can pay in the form of a continental financial crash, the mother of all EU political crashes, and years of bitter ill will throughout Europe.  Chancellor Kohl walked into a French trap on the euro, and the trap has sprung on Chancellor Merkel.

There is zero, repeat, zero sign that the Germans specifically or the Europeans as a whole have figured out what to do, much less agreed on a plan for getting it done.  Will Germany gnaw off its leg to escape from the euro trap, or will it allow the French to bind it forever in a transfer union in which thrifty and punctual German ants will subsidize Latin and Greek grasshoppers?

It is honestly hard at this point to say which alternative is worse for both Germany and Europe.  Is it better to have a sullen Germany yoked to a Europe that cheats it, or to go through a massive crash followed, one suspects, by a powerful and selfish Germany, a bitter, poor and unstable Club Med — and a scheming, jealous France?

This looks more and more like the choice Europe must make, and the biggest question is whether European leaders can make a decisive choice before events make the choice for them.

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  • dearieme

    Norman Lamont, former Chancellor of the Exchequer, put it well in this morning’s Telegraph: “cough up or break up”. I expect that’s the ‘inclusive or’.

  • JKB

    So when the Europeans go to war this time, will it technically be a civil war?

    And war it will be. If you can’t go forward, and you can’t go back, and sideways is nothing but pain, usually people start blowing things up. That way when all is said and done, a new order can be established.

  • Jordan

    I may be jumping the gun a bit, but kind of sounds like Europe is heading for another war with Germany versus ClubMed + France. Wonder which side the US will be on this time.

  • dearieme

    Nah: France and Germany both have branches of McDonald’s. Or does that supersophisticated theory of international relations no longer hold?

  • Charles R. Williams

    The longer the Germans delay in biting the bullet, the bigger the bullet will get.

  • Peter

    Germany better “gnaw off its leg to escape from the euro trap,” for realize this.

    If Germany allows ‘the French to bind it forever in a transfer union in which thrifty and punctual German ants will subsidize Latin and Greek grasshoppers,’ how much longer will the German’s remain thrift and hard working?

    This is the mother of all moral hazards.

  • Ken Moore

    A two-tier Euro is a possible outcome. Germany, the Netherlands, Austria and Finland could leave the Eurozone and create Euro 1. Greece and the rest in Euro 2 would remain a union but devalue their shared currency. Insight from Shedlock quoting Henkel . A new poll shows considerable German support for action as strong as leaving the EU.

  • Peter M. Todebush
  • Kris

    “You shall not crucify Europe upon a cross of Euros”?

    More lowbrow:

  • Gary Hemminger

    Peter has just made the point that I was going to make. If I were a German (actually I am, but an American German) why would I work so hard if I knew that the cheats were taking my money. Excellent point Peter!

  • Gabo

    Dear professor Meade,

    Your tone implies a moral judgement on the state of north/south affairs, with the trite analysis of organized and responsible north vs over spending passionate illogical south unable to keep the house in order. There is some truth but how about the acknowledgement that Germany benefitted enormously with the Euro? Specifically in making their exports ever more competitive ? It takes 2 to tango and both north and south benefitted from this set up.

    • Walter Russell Mead

      @Gabo: You have pretty comprehensively missed my point.

  • Glen

    I suspect that the result of either alternative would be a “powerful and sullen Germany, a bitter, poor and unstable Club Med — and a scheming, jealous France.”

  • Ulrich Elkmann

    @gabo: What you have spelled out is the way the political elites – the media as well as the politicians of all stripes – have been desoperately trying to spin the issue. For more and more of the public up North it looks that they are in the position of a shopkeeper who confronts a shoplifter and is being told ‘If you throw me out, who will you do business with in future?’

  • gooch mango

    I think there will be war, but it will not be an intramural EU affair (at least at first). It’ll start with Turkey, looking to take advantage of a weakened, suddenly isolated Greece. Long memories in that corner of the world, and many slights awaiting vengeance.

  • Alexandra Lagadinou

    A very intelligent analysis of the current situation here in Europe. Mr Meade is certainly correct in saying that we Greeks have nothing but moral contempt for financial puritanism. But we are not the only ones debating in European forums with nationalist selfishness.
    The only person in the last Euro Group meeting with a helpful agenda was not a European, but an American, Timothy Geithner.
    I believe the whole point in this crisis is for the Northerners themselves to abandon puritanism, not just in the financial sphere. They need to understand that life is for living. If they had just agreed to print a few euros the crisis would be over soon, and we Greek citizens would not have been forced to endure the current brutalization of our everyday life.

  • Gene

    War in Europe? Exactly which weapons are they going to fight with?

  • Jacksonian Libertarian

    So Germany gets a powerful currency, with every citizen’s wealth vastly enhanced over the neighboring countries, and German businesses would face greater competition in the future. As a political problem this is a no brainer, you always kick the can down the road and go for the instant gratification.

  • Eurydice

    I think what people aren’t getting about the situation in Greece is that nobody’s got the leisure to have moral contempt for German financial puritanism (at least not any more than their usual contempt for the Germans). The fact is that nothing is working in Greece now – the government is non-existant. The universities are closed, the public schools have no books or supplies, the government-run hospitals are bankrupt, pharmacies have been unpaid for years, the police won’t answer calls for help, the private sector (such as it is) will not extend any credit to the government. And it doesn’t matter how many new taxes the government announces, they haven’t even sent out the regular tax bills (due in June) to the public. I have family members who’ve been calling for months to get their bills and there’s been no response.

    So yeah, profligate, blah, blah, blah, but at this point they’re trying to tighten a belt when they don’t have any pants. Maybe Papandreou thinks he can pull one over on the Germans, but it seems to me that the situation has gone beyond that – like it’s heading more toward Germany being yoked to chaos than to cheats.

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