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View Full Version : Booming Germany would balk at baling out of the euro



The Lawspeaker
11-26-2010, 12:48 AM
---Propaganda warning ---
----good for laughs --- :wink



Booming Germany would balk at baling out of the euro (http://www.guardian.co.uk/business/2010/nov/23/euro-ireland-bailout-debt-crisis-comment)

Dropping the euro would lead to significant losses in trade and investment for Germany



http://static.guim.co.uk/sys-images/Guardian/Pix/pictures/2010/11/23/1290545710825/German-shoppers-007.jpg

Christmas shoppers in Berlin. Ditching the euro would put German economic success at risk.


Markets are impatient but have we arrived already at the main course? It looks as if we have. The euro (http://www.guardian.co.uk/business/euro) slumped more than two cents against the US dollar – a huge move. Investors are demanding an answer to a debate that has yet to be aired properly in Germany: how far will the eurozone's biggest economy go to defend the single currency?

It still seems amazing that a crisis in Ireland (http://www.guardian.co.uk/business/2010/nov/22/90bn-irish-bailout-turmoil-europe)could have accelerated the plot in such fashion, but there's no denying the facts. The chief executive of the world's biggest bond manager (http://www.guardian.co.uk/business/2010/nov/23/ireland-debt-crisis-banks-cash)is warning (grossly irresponsibly) that Ireland (http://www.guardian.co.uk/world/ireland) is risking a run on its banks. A bailout of Portugal is now regarded as odds-on since investors want to see the spending cuts that would hinder the country's growth. And bond yields for Spain and Italy are rising, betraying the lack of confidence in policymakers' attempts to contain the wave of worry.

It is not unnatural, therefore, that economists are thinking big thoughts – like the notion that Germany could decide to wash its hands of the euro project. Graham Turner of GFC Economics said Germany leaving the single currency to form "an alternative DMark bloc" is "a realistic prospect for 2011." He thinks Austria, Finland and the Netherlands might be game.

Is this really credible? Well, Turner is right to say a German exit from the euro would be the logical, and least painful, way to unbundle the single currency. The euro would plunge in value and the remaining members of the eurozone would enjoy a boost to their competitiveness. It is the lack of that quality that makes the current bailouts of Greece and Ireland look feeble.

But it is easy for economists to be provocative. Is Germany really prepared to take such a momentous step? We know how badly the bailouts play in Germany: they are seen as straightforward subsidies, rather than loans, to countries that have lived beyond their means. But it's quite a jump to believe Germany could adopt a go-it-alone strategy easily or as soon as next year.

For a start, German banks are stuffed with the debts of Ireland and other eurozone countries. There would have to be a massive reorganisation of asset and balance sheets. German bankers, inevitably, would voice their objections loudly if the idea of an exit gains momentum. Then there's the fact that, however much German popular opinion might dislike bailouts, the sense of crisis at home does not feel acute.

Germany is enjoying a mini-boom as its exporters reap the benefit of a currency that, for them, is undervalued. Do German companies want to risk their competitive advantage? Do German consumers want to risk the chaos of a break-up of the eurozone?

There are – in theory – alternatives. Angela Merkel has expressed the most gentle one: force eurozone bank creditors to accept losses in any crises post-2013. Her mistake was to announce the ambition without a fleshed-out policy. If she could produce coherent details, the goal would look less frightening.

Germany could also swallow hard, overcome its fear of inflation and encourage the European Central Bank to follow the US Federal Reserve in printing money. The debt-laden outer members of the eurozone would enjoy some relief. But let's be realistic, it's a long shot: Germany does not like quantitative easing.

So we return to the point that Germany needs to decide what it wants. Events in Ireland, as in Greece this year, have demonstrated that markets move faster than politicians. If the crisis does eventually sweep round to Spain (still a big 'if' since the numbers, on paper, don't look massively stretched), Germany needs to have a policy in place. It's time to get one.