A panel of German economists have broken an important European taboo by calling for failing members of the currency union to have the option of leaving the euro. The Financial Times:
The recommendation from the German Council of Economic Experts on Tuesday that, in some cases, eurozone members should be cut loose is another sign of the rapid shift in thinking in Germany amid mounting frustration over Greece.
“A permanently unco-operative member state should not be able to threaten the existence of the euro,” the economists said in a special report, published on Tuesday, calling for countries to exit the eurozone if it is necessary as an “utterly last resort”.
The French and the Italians are going to hate this idea—it would permanently weaken their position vis a vis Germany. But it may well be the only way that German public opinion will support the currency long term. For the Club Med countries, this means that unless they folllow the zone’s strict rules and carry through painful and profoundly unpopular reforms, they risk seeing the interest rate gap between them and Germany grow. Investors will look at Italy’s debt, or France’s slow growth, or the political climate in Spain, and decide that there is a risk that one or more of these countries would fall out of the euro and have to go back to a national currency. That perception of risk will mean that investors won’t lend money to those countries or to banks and companies operating in them at the same low rates they charge the Germans. Getting rid of those interest rate differentials was one of the major reasons that countries were eager to sign up for the currency in the first place
For Germany, on the other hand, the situation would be pretty good. Germany would enjoy good interest rates based on the country’s solid performance (as long as that lasts) and its neighbors would be constantly disciplined by markets to live up to their reform and budget commitments. If the occasional crisis over whether or not a given country might fall out of the euro came up, the euro itself would probably lose value for a while—which would also be OK with German exporters, who would temporarily benefit from a cheaper currency. And there would probably also be a flight to quality in Europe when a crisis looked possible, meaning that interest rates in Germany might even fall in a crisis as jumpy investors dumped Club Med stocks and bonds for safe German holdings. German banks would also have some interesting opportunities—collecting deposits in low-interest Germany, then lending (a bit more cautiously than in the last decade, one hopes) in the racier, higher yield countries. With a lower cost of capital than rivals in France, Italy and Spain, both German manufacturers and banks could manage very nicely in that kind of monetary union.
The trouble is that for the Club Med countries, this kind of euro would not make much sense. Why go through years of stagnation and pain if you still have to pay higher interest rates than Germany and watch your companies be forced to struggle on a playing field that is tilted against them: a common currency that is priced too high to make the firms competitive abroad, and comparatively higher domestic interest rates that gives competing German firms easier access to capital?
Club Med wants the euro to be irrevocable and for the exit of any member state to be catastrophic for the rest of the bloc, and they want to use their political weight within the eurozone to shift the rules in their favor: easier access to German and other ‘saver country’ money, with fewer conditions in a currency whose governance is more like America’s loosey-goosey Fed than the Prussian disciplinarian approach Germans go for in a big way. This fight between two fundamentally different ideas about the nature of money have been at the heart of the politics of the eurozone ever since the crisis erupted in 2009. The fight isn’t over yet. Germany has the upper hand at the moment, in part because the Greeks were so truculently stupid and amateurish that they united the whole eurozone against them and at least temporarily discredited the Krugman/Sachs school of neo-Keynesian economics. But the the French, Spanish and Italian political and economic establishments are increasingly horrified at the direction in which German leadership is taking the currency, and they are not going to simply sit there and let German economists write the rules to suit themselves.
The Club Med way won’t work for Germany, the German way is a Via Dolorosa for the south, and nobody has yet imagined a third way that could make sense for everyone. That third option may be impossible; if so, at some point the euro may have to be unwound, perhaps by a German exit.
Nothing has been settled in the European monetary crisis. The key players have not agreed on the rules of the game, and as public opinion on all sides becomes more agitated, workable compromises will be harder to find. The Obama administration, judging from its public statements, appears determined to remain irrelevant in the European process, contenting itself with repeating Keynesian cliches.
Seventy years ago, in the summer of 1945, Europe was in much worse shape that it is now, and its divisions were much deeper. The Truman administration, after some initial hesitations and false starts, was ultimately able to play an incredibly constructive role and help the Europeans begin a process of reconciliation and cooperation that made western Europe one of the richest, happiest and most peaceful regions in the whole history of the world. This administration, or its successor, will need to find a way to cooperate with key European partners to prevent some of those gains from unraveling.