Euro crisis: “The crisis of the eurozone has only just begun.”

I hope it wasn’t something I said… At the Guardian’s Comment is Free, Timothy Garton Ash feels “more depressed about the state of the European project than [he has] for decades.”

The crisis of the eurozone has only just begun. The bond markets have not been convinced even by last week’s giant “shock and awe” bailout of Greece. The one thing that moved them was the European Central Bank’s readiness to start buying eurozone government bonds, but it still costs multiples more for the Greek or Portuguese government to borrow than it does for the German government. A leading bond strategist tells me he now sees two alternatives: either the eurozone moves towards a fiscal union, with a further loss of sovereignty by member states and drastic deficit reduction imposed by this external constraint, or some of the weaker member states default, either inside the eurozone or by leaving it altogether. At which point capital flees, even more than it has already, from the weak to the strong: that is, from the eurozone to elsewhere and, within today’s eurozone, to Germany.

The domestic and international politics of both these paths are bloody. (In Greece, already literally so.) The tensions within European societies will rise, but so will those between European states. In particular, resentments within and towards Germany, the continent’s central power, are bound to increase either way: if Germany imposes tough terms for a fiscal union while at the same time underwriting other governments’ risk, or if it lets a Greece or Portugal go to the wall, resulting in further capital flight to Germany. In the very best case, if the old “challenge and response” pattern of integration through crisis works once again, Europe will be preoccupied with resolving its internal economic and financial problems for years to come.

And don’t get too hung up on the political leader he chose as an example, the issue of leadership has been identified elsewhere.

Meanwhile, the German Chancellor Angela Merkel continues her domestic political agenda – as explained by the BBC’s Stephanie Flanders.

Be in no doubt: in return for signing-off on this rescue package, Germany will want the new rules of the road to be written in Germany’s own image.

Chancellor Merkel has just alluded to this in her speech here – Germany wants tough fiscal controls for every eurozone country to come out of this. And, as one official said to me, at times like this, what Germany wants, Germany tends to get.

But outside Germany, the worry is that the big losers in all this won’t be speculators – but ordinary citizens in countries like Spain and Portugal who find they cannot combine massive budget cuts with decent economic growth.

Make no mistake, the UK and the rest of the world will suffer as well, if the conclusion of this crisis is a eurozone based on the same export-led growth model as Germany.

The rest of the world needs domestic demand in the eurozone to grow, not shrink even further, in the next few years. But right now it is very difficult to see how that will happen.

Indeed, if Germany has its way, the eurozone is going to make an even smaller contribution to future global growth than we thought.

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  • Neil

    if Germany imposes tough terms for a fiscal union while at the same time underwriting other governments’ risk, or if it lets a Greece or Portugal go to the wall, resulting in further capital flight to Germany.

    There are suspicions floating around at this time, that the timing of the naked short selling ban coincided with the release of German bunds. Given the immediate effect of the ban, investors who had engaged in naked short selling had to find government bonds to buy, and hence the Germans managed to make 3.4bn straight away.

    It’s not inconceivable that the German ban was intended to earn the Germans money, it certainly has had that effect. So that the Germans might happily engineer a situation whereby the capital flows in is not unlikely if the situation above is true.

    I should add, I know very little about economics, so I might be wrong in how I’ve explained that, but I’m learning more each day. Fascinating stuff.

  • The Spectre of Catastrophe Returns

    http://www.wsws.org/articles/2010/may2010/pers-m17.shtml

    Imperialist dilema and the coming world war

  • Alias

    “Make no mistake, the UK and the rest of the world will suffer as well, if the conclusion of this crisis is a eurozone based on the same export-led growth model as Germany.

    The rest of the world needs domestic demand in the eurozone to grow, not shrink even further, in the next few years. But right now it is very difficult to see how that will happen.”

    The “rest of the world” will do just fine but the circa 8% of the world’s population who have inextricably interlinked their states with each other will see the utter folly of surrendering their sovereignty to a supranational agency leave their nations in economic and social ruin.

    The EU’s share of global GDP is in free-fall, collapsing from 27% in 2000 to a projected 15% by 2018. According to the European Commission, the EU’s share of global GDP will be a projected 10% by 2050. In other words, 90% of the world’s GDP will be generated outside the EU.

    Indeed, the cost of regulating the single market adds 600 billion euros a year onto business costs in Member States while the benefit of the single market to business only amounts to 160 billion euros, so having a single currency only enabled EU businesses to lose 440 million euros more than they gained – no longer the EU share of global GDP is in free-fall. It was purely a political currency, and the structural defects of a currency without a state are now so apparent that the best the europhiles can do is ignore the raging storm rather than engage in previous hobby of nodding their little bobbleheads and tut-tuting at those who pointed out that it would all end in tears.

    These europhile serfs tied themselves to the oars of an already sinking ship, and now they shall all drown together – and take their cargo and passengers down with them. Unfortunately, even though the UK wisely retained its currency, it made the same mistake of integrating its economy in the EU, and will be economically devastated by the collapse of the Euro.

    In regard to Germany, their banks are the most over-capitalised in the EU. No major German bank has a leverage ratio under 52. And contrary to what we are being told, the losses in that banking system are staggering (more than the EU bail-out fund) and even better concealed than Greece. If Germany is now in national survival and not Europhile mode then you can bet that Ms Merkel has good reason to panic…

  • Alias

    Typo: “In regard to Germany, their banks are the most under-capitalised in the EU. No major German bank has a leverage ratio under 52.”

  • Mick Murphy

    a punt for the Punt.The Euro is in it’s death throes brought on by “irrational exhuberance” .I hope you all enjoyed the party of the last few years .To quote Leonard Cohen,”I have seen the future and it is Hell”.

  • Mick Murphy

    a punt for the Punt.The Euro is in it’s death throes brought on by “irrational exhuberance” .I hope you all enjoyed the party of the last few years .To quote Leonard Cohen,”I have seen the future baby, it is murder”.