Monday, July 09, 2012

Wolfgang Münchau gets "shrill" on the euro crisis

Wolfgang Münchau writes pessimistically about the economic future of Europe in Eurozone crisis will last for 20 years Financial Times 07/06/2012. The dramatic title of his column is actually misleading. What he says is that if you take what German Chancellor Angela Merkel is saying seriously, it would take 20 years to solve the euro crisis. And that don't have that long. He's really writing about the remarkable self-delusion and lack of responsibility being shown by the EU leadership.

He's right to point to the central political failure of leadership in Germany:

What we know now is that Germany will not agree to mutualised deposit insurance. It cannot even agree to give the European Stability Mechanism a banking licence so that it can leverage itself. If Germany cannot do the minimum necessary now, why should anybody think it can agree a political union? This is less credible than the promise by an alcoholic to give up drinking in five years.

The politics of the euro rescue has crossed an important threshold in Germany. A narrow majority is still in favour of the euro, but a majority is against further rescues. A group of 160 economists, led by Hans-Werner Sinn, president of the Ifo economics institute, last week published a manifesto against a banking union. It was full of sound and fury, but the importance of this document is that it reflects a consensus view.

Angela Merkel's answer was revealing. She told them that there is nothing to worry about. The banking union was about joint supervision, she said. There will be no joint deposit insurance. She has a very different understanding of a banking union than the European Central Bank. At most, I expect this new banking union to cover the 25 largest banks, and leave those cajas and Landesbanken in national control. This is like an alcoholic who promises to drink only the better cognacs from now on. [my emphasis]
And he points out what a joke the supposed resistence to Angie's policies on the part of Italy's Mario Monti and Spain's Mariano Rajoy really was:

With interest rates on 10-year government bonds over 6 per cent, neither Italy nor Spain can sustain their membership in the eurozone. This is what Mario Monti and Mariano Rajoy should have made clear to Angela Merkel at the summit. They should have told her that their governments would make preparations for a withdrawal from the eurozone if there was no change in policy. A resolution requires either a eurozone bond – or some other form of debt mutualisation –in both the public and private sectors, and ECB bond purchases. Germany does not accept the former. The ECB does not accept the latter. [my emphasis]
Münchau basically sees two possibilities: let the current situation drag on until some event like a major bank run in Spain triggers a collapse of the eurozone, or, European leaders can find the leadership ability and sense of responsibility so sadly lacking in their actions the last three years on the euro crisis to plan for some kind of controlled unwinding of the currency union. "A collapse would constitute the biggest economic shock of our age," he says.

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