…for you dear, anything
For you mean everything
To me…
When I read about Mario Draghi saying he would do what it takes to save the euro, this song from the musical Oliver suddenly popped into my head. In the musical, the sweet young Oliver Twist sang this to the beautiful Nancy, who was a surrogate mother/older sister who he saw as his salvation. It was a lovely show — except, by the end of it, Nancy was brutally murdered by the ruthless Bill Sykes.
When I related this story at a recent seminar, someone in the audience asked, “In your story, who is Bill Sykes?”
I said, “The market, of course.”
The beautiful Nancy, then, is the euro, doomed to be smashed asunder, unless sense prevails.
The current situation is clearly unstable. Something has to give. I can see only four alternative paths, the worst of which is the one outlined above — where the market forces the split, perhaps starting with a Greek exit, which would act as the thin end of the wedge, forcing succeeding countries out.
Another path, which has a lot of believers, is that the muddle-through status quo will continue … till, I guess, global growth picks up dramatically and far-reaching structural reforms are implemented across Europe so that Greece and Portugal and Spain and Italy and all the rest become globally competitive. Anything is possible, I suppose; but betting on strong global growth and an increasingly docile European population would have bookmakers everywhere licking their lips. It is hard to see how this approach will not revert to Plan A.
Even if the status quo holds for several years, the fundamental imbalances in competitiveness between Germany – and its close relatives – on the one hand and the rest of the euro zone will show up again, and we will be back to a more virulent square one.
The third alternative is that the euro splits into two, with the “core” countries going one way and the “peripheral” economies going another. This is conceptually appealing, since the new peripheral euro would depreciate dramatically helping all those countries to get back to breathing normally — in other words, it could be an effective solution.
However, this solution, which would be very difficult to implement – who belongs to the core, for instance? – would also not sustain itself. There is precious little that many of the peripheral economies – say, Portugal and Ireland – have in common, suggesting that the new peripheral euro will remain unstable at birth. Indeed, this is the fundamental problem with the current euro.
The last alternative – the only one I believe is feasible – is that Germany takes the bull by the horns and leaves the euro. All the countries revert to their original national currencies.
This will, again, provide the oxygen of currency depreciation to the peripheral countries, which is necessary to enable a sustainable solution. Equally important, this approach seems doable, since it would be driven by Germany, which is still strong and, in any case, the de facto leader of the euro.
Many may feel this solution is not feasible since Germany has a huge amount vested, both economically and politically, in the success of the euro. It has no doubt benefited substantially from the euro, which magically conjured up huge demand for German exports from the rest of Europe. In its current state, however, the euro zone is hardly an attractive market — many companies all over the world are making contingency plans for substantially lower sales to Europe. Indeed, the threat of falling German exports and an increasing budget deficit has even awakened Moody’s, which, for once, appears to be slightly ahead of the curve.
The other economic objection to this plan is that the new Deutsche Mark would appreciate rapidly, which could seriously thwart Germany’s growth. While the appreciation is a near-certainty, the fact is that the German economy has time and again shown incredible resilience and the ability to come back strong — recall the trauma of unification and the 1:1 exchange ratio. There is no reason to believe it won’t be able to do that again.
As to the political difficulty, it is a no-win situation. However, it stands to reason that Ms Merkel has less of a chance of being hanged if she recreates “Deutschland uber alles” rather than continues the status quo which, to many, appears to be “Deutschland zahlt fur alles” — Germany paying for all.
Time, more than ever, is of the essence, since the markets won’t wait. Governments all over Europe doubtless have a range of contingency plans in place. I hope this is one of them and I’m looking for odds that Germany pushes the button on January 1, 2013.
