Another fudge will bring us closer to end of euro
In the event, all of the summits held have proved to be a total disappointment, yet the eurozone is still intact and the currency has not imploded. However, there is a political, social and economic limit to how long this can be sustained. The economic and fiscal crises in the afflicted countries are getting worse and threaten to blow up the system.
Historians correctly draw parallels with events such as the Great Depression of the 1930s, the breakup of the gold standard, and the collapse of Bretton Woods. Politicians failed to grasp the nettle and the ensuing economic chaos resulted in political chaos and ultimately war in some cases.
If anybody doubts the dangers inherent in political impotence and incompetence, a read of any of the Second World War histories that are currently doing the rounds, or an examination of the savagery that characterised the Greek civil war, should quickly dispel those doubts.
Economically and politically, Europe would appear to be in a very dangerous place at the moment.
If a solution to restore growth, living standards, and inequalities both within and between countries, the consequences could be very dangerous. Who knows?
Consequently, the EU Council meeting coming up this weekend once again promises to be a bit of a make-or-break situation. The eurozone crisis has steadily worsened over the past year and with the entry of Spain and Italy into the danger zone, it is clear to even the greatest optimists that the situation is moving into the “red alert” area.
Ireland, Greece and Portugal are being swamped by a massive and arguably unsustainable debt burden, and it would just take a couple of years of negative growth in Spain, to push that country into a very dangerous debt situation. Italy, of course, is also teetering on the edge of the precipice.
Against this background, if the meeting this weekend fails to come up with workable and believable solutions, the future of the euro will move another step closer to implosion. A Europe-wide solution to the banking crisis; the creation of a euro bond market where risk is pooled; the printing of vast sums of money to bail out those countries that have unsustainable debt burdens and barely believable fiscal adjustment pathways; and a much greater pooling of political and fiscal sovereignty are all requirements for the creation of a sustainable economic and monetary union in Europe.
Of course, it is inconceivable that the Germans in particular would agree to all of these developments. The odds this weekend would appear to favour another political fudge, and another couple of small steps to the ultimate destination.
Such an outcome would not spell the end, but would certainly move us another step closer to the breakup of the euro. For the Germans, there is a particular dilemma. Basically, they are being asked to sign the cheques necessary to save the very flawed system.
The future of the euro is in the hands of the Germans, however. If they decide to sign the cheque, at potentially enormous cost to the German economy, then the euro will muddle through. If they don’t, the euro could fall apart and the downside for Germany would also be very significant — the German currency would appreciate sharply in value, and the German banks would suffer huge losses, necessitating a domestic bank rescue.
The stakes are very high either way, but we can be sure that Angela Merkel and her advisers have the balance sheet in front of them as we move into the weekend.
