Another day, another injection of hope as Germany and France attempt to reassure markets by putting nothing new on the table! The very thought of German, French and Greek leaders each in their own respective offices exchanging views on what to do next over the telephone in an attempt to appease markets really is enough to send one into a mental decline. The result? Just pour a little more pain-killing substance over the Greek patient and say that Greece remains an integral part of the Euro and markets will buy it! So it seems that they did for a day but with no new drugs in available that could finally see off the Greek disease might German and French leaders by their very ineptness be unwittingly signing the death warrant not only of the Euro but also the EU?
I suppose the first question to consider is whether Greece might yet bring the Euro crashing to its knees. That is unlikely in my view – I doubt that one small nation state albeit one that has for the best part of a generation subverted all the rules of economic common sense could bring the single currency system to its knees. Markets will decide of course but my guess is that if anyone one single euro member does that it will far more likely be Germany.
A very interesting article from Jeremy Warner published in the Daily Telegraph today asks an even larger question – whether German indecision might also drag the rest of the world down. I commend the article in every respect but even if I well recognise the possibility and that of necessity in any event we are all going to suffer more uncertainty and permanent change in our lives caused by sovereign debt and lack of global growth I do not personally believe that the rest of the world will be brought down. Neither can I yet believe that Germany would be prepared to see the Euro collapse and maybe lose all the benefits that a lowly valued currency has provided for its economy over the past twelve years at the expense of hell for most of the rest.
In this fascination article Warner quotes from a paper written by Paul De Grauwe, professor of economics at the University of Leuven in which he says “a monetary union can only function if there is a collective mechanism of mutual support and control. In the absence of political union, the member countries of Eurozone are condemned to fill the necessary pieces. What has been achieved, however, is still far from sufficient to guarantee the survival of the Eurozone”.
The above argument has significant merit even if it fails to recognise that the political climate has now changed significantly and that the electorate of many larger euro states have had enough of paying a price for the failings of others. Political union will in my view never occur in Europe now. It is too late, the wounds are too deep and the reasoning fatally flawed. Indeed, I doubt that even if the European Union was not going through the present financial and economic turmoil exposed by the combination of global banking market collapse in 2008 plus a longstanding failure to police rules put in place when the euro was originally founded back in the late 1990’s that political union could ever have been possible. That might not stop them trying of course but in my view culture, language and lessons now learned would mean that any attempt at political union id doomed to failure.
For now Germany and France will ensure that Greece is propped up and I guess markets will buy into that for a short while longer. That was the message from yesterday backed by yet another promise from the beleaguered Greek prime minister that his country would meet the obligations of sobriety as it attempted to cut spending. But as we can well imagine, a year or two down the line even if Greece had managed to successfully cut spending without being strangled by political strife and insurrection we might well guess that GDP will have sunk at an even faster pace. Result? Greece will continue to need even more support and will never be able to pay back its dues. A self fulfilling prophecy then! Hence I suspect that as both Germany and France know all too well that Greece will remain a permanent and seemingly intractable problem with the potential to hold all the other political dreams and desires back that whether Germany likes it or not the Eurobond idea will because markets will demand it eventually see daylight sometime before the whole pack of cards might otherwise collapse.
I probably dislike the idea of Eurobonds even more than you but I hope I am sensible enough to realise that whatever is decided about the future of the euro is much better done in an orderly fashion. Ultimately I do believe that the euro will need to be radically rethought although I do not go as far as believing that the world authorities including the ‘brics’ will allow the idea to completely collapse. In fact it is they will eventually most probably come to the rescue of the single currency and yet at the same time drive forward longer term change. I doubt that Germany will go its own way and I suspect that whichever way Germany does France will go along with it. Suffice to say even if seemingly cruel and heartless that in economic terms France needs Germany even if Germany hardly needs France.
I began by asking whether the present euro problem might bring down the EU. The answer is that while it will not bring down the EU it will significantly change it. Ten years ago I wrote that the EU had peaked in terms of power and hold. That was before Lisbon and all the disagreement that surrounded that late alone enlargement. Today though if you believe as I do that political and further economic union is not possible then you probably have to conclude that the EU has gone as far as it can.
Howard Wheeldon is the Senior Strategist at BGC Partners
