The EU crisis continues to roll on, now with even German bonds coming under pressure. And there seem to be mounting calls for a fiscal union. Here’s ECB executive board member José Manuel González-Páramo:
…we cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies.
And former foreign minister and Green politician Joschka Fischer:
…Fischer urged Chancellor Angela Merkel on Friday to admit to Germany that ceding central bank independence and some sovereignty, and underwriting other states’ debts, was the inevitable price of saving the euro.
“There is no way round it: the price of the stability union will be a ‘transfer union’ and vice-versa,” Fischer told Reuters in an interview.
German critics of bailing out over-indebted members of the euro zone such as Greece call this process a ‘transfer union’, whereby fiscally-disciplined countries like Germany pay for the excessive debts and deficits of their European partners.
“You can’t have one without the other — that is the price of the euro,” said Fischer, who was a strong advocate of Europe as foreign minister from 1998-2005, when his Greens shared power with Gerhard Schroeder’s Social Democrats (SPD).
But is it at all likely that Merkel would agree to any such union, which would saddle Germany with southern Europe’s debts? And even if she (or anyone else) wanted to agree, wouldn’t it require treaty changes and parliamentary ratification and all that sort of thing? Isn’t it getting a bit late for that? In which case maybe we’re looking at the death of a currency:
No, what this is about is the markets starting to bet on what was previously a minority view – a complete collapse, or break-up, of the euro. Up until the past few days, it has remained just about possible to go along with the idea that ultimately Germany would bow to pressure and do whatever might be required to save the single currency.
The prevailing view was that the German Chancellor didn’t really mean what she was saying, or was only saying it to placate German voters. When finally she came to peer over the precipice, she would retreat from her hard line position and compromise. Self interest alone would force Germany to act.
But there comes a point in every crisis where the consensus suddenly shatters. That’s what has just occurred, and with good reason. In recent days, it has become plain as a pike staff that the lady’s not for turning.
People are now thinking the unthinkable, it seems.
What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world’s major reserve currencies. That promise today looks to be in ruins.
Contingency planning is in progress throughout Europe. From the UK Treasury on Whitehall to the architectural monstrosity of the Bundesbank in Frankfurt, everyone is desperately trying to figure out precisely how bad the consequences might be.
What they are preparing for is the biggest mass default in history. There’s no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It’s going to be anarchy.
But others don’t see a break-up of the eurozone quite so grimly. Jeremy Warner in the Telegraph:
The currency team at Bank of America Merrill Lynch have taken a stab at what “fair value” would be for the major legacy currencies in the euro in the event of a breakup. And they’ve come up with some quite surprising results.
The conclusion is that Spain, Italy, Portugal and France are all overvalued against the US dollar as things stand, with Spain the most at around 20pc. That’s not so surprising, you might say, and if anything probably understates the true position.
But look at the countries thought to be undervalued. Ireland, on the Merrill Lynch analysis, is the most undervalued even though it is undoubtedly completely bust, while Germany, which conventional wisdom would say was massively undervalued as a result of its membership of the euro, is actually only quite marginally undervalued – by around 5pc.
…it’s possible that return to sovereign currencies wouldn’t be quite as traumatic as everyone assumes.
And Daniel Hannan:
Nor should leaving a currency union be any more complicated than joining one. I asked a Slovakian economist the other day how his country had managed the monetary transition when it divorced the Czech Republic. “Very easily,” he replied. “One Friday, after the markets had closed, the head of our central bank phoned round all the banks and told them that, over the weekend, someone from his office would come round with a stamp to put on all their banknotes, and that, until the new notes and coins came into production, those stamped notes would be Slovakia’s legal tender. On the Monday morning, we had a new currency.”
Sounds a bit of a doddle, really. If the eurocracy regard it as unthinkable, it may not be that it’s actually particularly difficult, but simply that they don’t want to see the end of their EU political project, with its perks and its power and its prestige.