Euro crisis: “If fiscal union is not on the cards, the only other option is eurozone breakup”

In the Irish Times, Dan O’Brien provides a bleak assessment of the Greek problem at the heart of the current euro crisis.  From the Irish Times article

The chances of things getting worse are high. Societal strains and rampant corruption do not in themselves cause economic weakness – just look at China and India – but they don’t help. Alas for Greece, even if both problems were to disappear tomorrow there is little reason to believe its economic rot would stop.

Greece exports so little that it is the most closed economy of any among the 27 countries that form the EU. A small economy of just over 10 million people can never get rich without exporting.

No economy can get rich without innovating. About the best indicator of a country’s capacity to innovate is the amount spent on research and development. In Greece, businesses and the state spend 0.5 per cent of GDP on research annually, less than one-third of the EU average. Of the 15 long-standing members of the EU, it has consistently had the lowest research spend.

There is very little reason to be optimistic about Greece. Its economy, politics and society don’t work. This is not only very bad for Greeks, it is also bad for the people of the 16 other countries in the euro zone. If it implodes, it may well bring the single currency down with it.

Meanwhile, John McHale at the Irish Economy blog points to Wolfgang Münchau in the FT on “Why debt rescues will boost the scenario of a closer union”.  As Wolfgang Münchau admits

Future perceptions are hard to predict, which is why my path to fiscal union is not a forecast but merely a scenario. And it is clearly an accident-prone process. But with each rollover, you will have to be progressively bold to vote no. This is why I believe that a debt rollover favours a political union in the long run.
Back in the Irish Times, John McManus argues that Europe is “much further down the road” to further integration than many realise.

What should happen now is very hard to say. If the ECB capitulates the politicians in France and Germany will save face. They will be able to claim it was all the ECB’s fault and it should never have lent the money, but what choice is there but to bail out the bank?

This is a definite possibility and would be the way to go if the objective was to bring about a once-off subsidy from the rich states to the poor ones.

The alternative is to put some sort of structure in place to take the debt off the ECB balance sheet before writing it down. It could take many forms, but some sort of common European treasury or bond-issuing body seems the most sensible.

However, whatever shape it took it would represent a lurch towards fiscal and political union that many in Europe might not favour. But, the history of European integration has been one of crisis followed by further progress and, from the outset of the current crisis, many have predicted it would lead to further integration. Looking at the predicament the ECB has now found itself in, it would appear that we are much further down the road than we realise.

But that’s not the only possibility.  And Kevin O’Rourke, also at the Irish Economy blog, spotted Nouriel Roubini’s post at the FT blog

The muddle-through approach to the eurozone crisis has failed to resolve the fundamental problems of economic and competitiveness divergence within the union. If this continues the euro will move towards disorderly debt workouts, and eventually a break-up of the monetary union itself, as some of the weaker members crash out.

As Kevin O’Rourke says in his post

In truth, I don’t think anyone really knows what is going to happen to the eurozone, and Wolfgang is admirably frank about the fact that he is just describing one possible scenario. But an increasing number of people are now arguing that eurozone politicians aren’t going to be able to fudge the unfudgeable forever.

But the options appear to be limited, and stark.  As guest-blogger Megan Greene argues at the Guardian’s Ireland Business blog

The euro is dying a slow death. Political leaders are unlikely to take the steps necessary to address the underlying factors creating the current euro crisis, and the eurozone will eventually break up as a result.

To highlight the severity of the euro crisis, one only needs to glance at credit default swap (CDS) spreads for the peripheral euro area countries. CDS is a form of insurance against default or restructuring. The higher the CDS spread, the more likely investors think a sovereign default is.

In the first week of June, five-year CDS spreads for Greece were a whopping 1495 basis points, for Portugal 708, for Ireland 650 and for Spain 255. This compares with only around 200 for Iceland, a country that underwent a private default only two and a half years ago.

The euro crisis is just as much underpinned by politics as it is by unbalanced economies, rigid labour and product markets, burst property bubbles and unsustainable public and private debt levels. This has been particularly evident in recent weeks, as a cacophony of voices has emerged at the EU level on how to handle Greece.

Ultimately, it is politics, more than unsustainable debt, that will threaten the very existence of the euro.

With persistent imbalances within the euro area and the inevitable restructuring of Greek, Irish and Portuguese debt, there are two possible endgames for the euro crisis: fiscal union or eurozone breakup.

Read the whole thing.

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  • OneNI

    Any boookies giving odds on the Republic re-joining the sterling area yet? The Republic’s UNDERLYING export economy is actually quite strong – if it could free itself from the Euro (and effectively devalue) recovery would be alot quicker

  • On “Nama Wine Lake” I read the transcript of Patrick Honohan’s appearance on Vincent Browne last week – what an abject failure of leadership among those entrusted with momentous decisions including Governor Professor Honohan himself.

    When Brian Mulroney excoriated John Turner in the 1984 Canadian Election Leaders Debate:

    {{You had an option, sir. You could have said, ‘I am not going to do it. This is wrong for Canada, and I am not going to ask Canadians to pay the price.’ You had an option, sir — to say ‘no’}}

    Mulroney was only talking about some State appointments. How much worse could be said of the procession of Irish ministers and mandarins who come away from Brussels with nothing, not even their dignity?

  • Pete Baker


    Wider picture?

  • aquifer

    France and Germany have got to re-decide that they are prepared to pay something for the currency zone that pays their exporters so well, otherwise it could be game over and economic contraction for all.

    Maybe the small states could issue a parallel digital currency to stimulate their economies, that is designed to appreciate over time until it is convertible into Euros again. See Transaction costs are very low because they happen within people’s own PCs, keeping banks out of the loop. Could appeal to chronic deal doing tax dodgers in the PIGS.

  • I did not get to read the FT articles as they required a subscription. In none of the articles is the German Constitutional court mentioned, except in the context of illegality of fiscal union.

    In the next 2-3 weeks (July 5th has been bandied about), the German Constitutional Court is due to sit to decide upon complaints that the Greek bailout has been illegal. I suspect that the German Government has a very good idea about how that judgment is likely to go. That is why I believe it will broadly favour the handling of the crisis by the German Government. From what I read, the legal issue is not simply “black and white” The Court may well say that “the bailout can only be legal if’….”

    At the moment, the German Government and the ECB are at loggerheads on how to deal with the crisis. As I understand it, the ECB is opposed to debt restructuring. The Germans only want to help Greece if private investors take some kind of “haircut”

    I believe that once the Constitutional Government has delivered its judgment, German “arm-twisting” will become stronger and EU leaders will realise that they have no choice but to do what the Germans tell them.

    That is the likely short term scenario. In the longer term, I agree that the euro is dying a slow death and can not survive without full political union, which is unacceptable to the present adult generations. I also believe that Greece is incorrigible for many reasons, including those put forward by Dan O’Brien.

    The best solution is to expel Greece from the Euro zone, let it go bankrupt and leave it to paddle its own canoe. Banks, including American, German and French banks will suffer but any other solution is throwing good money after bad and cannot achieve anythiing except postpone the day of reckoning.

  • Drumlins Rock

    Seymour, that is more or less what needs to happen, and secretly most economists know it, but the idea is the longer you prop Greece up the less dominoes it will take with it when it falls, almost certainly Ireland, probably Portugal, if they can draw the line at Spain or string it out long enough to prop up Portugal the gamble will have worked, unfortunately it could also be the case they are waiting their resources and will have nothing left when say belgium or Italy comes knocking.

  • Drumlins Rock

    It looks like things are getting dicey in the Euro zone, if Greece defaults now, in a messy fashion, surely its 90% certain Ireland will follow? and hitting the UK banks too, wonder is this why NAMA is so keen to dispose of UK assets?