Monday, 4 March 2013

10 reasons why the euro crisis may be incurable

Commentary: Many forces could act to prolong the agony

By David Marsh, MarketWatch
An earlier version of this column misstated the duration of Greece’s inclusion in the Ottoman Empire. It has been corrected.
BERLIN (MarketWatch) — The late German economist Rüdiger Dornbusch told us that a crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.
The point is that the euro EURUSD -0.10%  saga can persist for a while yet. History shows how unstable equilibrium can last surprisingly long periods. During the First World War the Western Front of mud and murder was frozen into the terrain for 3 1/2 years. The Cold War between the Soviet Union and the U.S. lasted 40 years. For four centuries, Greece was part of the Ottoman Empire.
Perhaps we should give up all hope of a solution. A long period of further confusion lies before us, similar to the continuous, inexplicable, unwinnable conflict among Oceania, Eurasia and Eastasia in George Orwell’s “1984” novel of a war-torn totalitarian state.
There are 10 reasons why the crisis may be incurable.
Italian politician Beppe Grillo
1. The Italian election result was a deep setback for euro optimists. Many say the populists’ victory was a vote against austerity. But more broadly it was a vote against the country being led in a way that no longer benefits Italians. The real structural reforms needed to get Italy out of the mess have not been introduced. Not reassuring: comedian-turned-vote-winner Beppe Grillo said at the weekend Italy would collapse financially in six months.
2. Fundamental disagreements over monetary union between the two key euro members Germany and France are increasing. Questioning over the compatibility of the two countries’ objectives and methods — France wants “solidarity”, Germany “competitiveness” — is getting louder. Mutual willingness to make concessions is falling.
3. The lack of a reform-minded Italian government has made more or less inoperable the European Central Bank’s promised rescue mechanism, the untested OMT program to buy government bonds. A pivot of this mechanism, at least as applied to the larger countries of Italy and Spain, is that they should obey conditionality ordained by the European Union and the International Monetary Fund. Who in Rome can be expected to carry out orders?
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4. Germany will not and cannot stimulate its economy sufficiently to haul the distressed southern states out of the abyss. And in contrast to the favorable international environment of the German reform years 2003-05, when former Chancellor Gerhard Schröder brought in his controversial but successful Agenda 2010 initiative, Europe offers these countries no external growth impulses to cushion the painful effects of domestic reforms.
5. Chancellor Angela Merkel’s political inhibitions against taking bold and creative euro repair measures will grow noticeably larger before the German federal elections on Sept. 22. Few in Europe think the Germans have been particularly generous up to now with help for other countries. But they have been. The bitter truth is that we have now probably passed the high point of German readiness for European assistance.
6. The southern states still see enormous barriers against departing from the euro. Why should they want to when the money keeps flowing, from the ECB and other sources? And Germany and the other creditor countries will not and cannot simply force them out.
7. Similar considerations apply to any German readiness to leave unilaterally. Even though the Germans would take others with them, the political and economic consequences of a reversal of 60 years of post-Second World War German foreign policy would be earth-shattering. For the time being, there is a perfect stalemate. But this, too, may not last for ever.
8. The other major economic powers — the U.S., China and Japan — are not likely to press in the next few months for radical euro healing measures. They have no interest in provoking a firestorm that would lead to a destabilizing appreciation of their own currencies and hamper recovery efforts. It may look like a move away from globalization — and perhaps it is — but each country is too preoccupied with its own problems to force the euro area to get its act together.
9. In the run-up to the German election, where Merkel is the opinion poll leader right now, the French government will be increasingly tempted to cooperate with the opposition German Social Democrats to diminish Merkel’s political prospects. It’s difficult to see how intervention from President François Hollande can make much difference to German electoral attitudes. But he may try it. For the vaunted Paris-Berlin tandem, not positive news.
10. Should the ECB succumb to the temptation to buy Italian government bonds without accompanying government-agreed conditionality, that would represent a 100% reversal of repeated solemn promises by ECB President Mario Draghi. The result in Germany would be a storm of indignation that would take many by surprise and could sweep away much that has been accomplished. As in “1984” we should prepare ourselves for bleak times.
David Marsh is chairman of the Official Monetary and Financial Institutions Forum.
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