David Cameron and Angela Merkel have a fundamental disagreement. Cameron is calling for the ECB to stand behind the euro with (in effect) an unlimited commitment to back the government debt of all eurozone members, including Club Med. Merkel refuses, saying that it’s against the treaties, against German Constitutional law, and will cause inflation. On these points Merkel is right, and Cameron knows it.
But he thinks that the emergency is so serious that we should ignore the legal niceties—in an emergency, de facto beats de jure—and accept the inflation risk. After all that’s medium-term, whereas the threat of euro collapse is next week. And if we don’t have a short-term, we certainly won’t have a long-term. But Merkel is also calling for grinding austerity programmes in the Club Med countries, which virtually preclude growth and recovery.
If the ECB follows Cameron’s “Big Bazooka” formula, it will end up with a vast pile of junk bonds on its hands, and will be, in effect, bankrupt. Yes, it can print money. But we know where that leads. The eurozone Countries will have pooled debt. The strong states will have to support the weak. And as Angela Merkel well knows, the last man standing in the eurozone will be Germany, which will ultimately be responsible for the debts of everyone else.
We’ve heard a great deal about the German fear of inflation, and that’s very real, and justified. Remember Weimar, and the wheel-barrow loads of worthless currency. But I am sure that Merkel also recognises the risk that Germany, not the ECB, will end up as lender of last resort. The Germans have spent two decades subsidising the East (to little effect). It is not realistic in political terms to ask them to subsidise the whole of the eurozone. German voters won’t stand for it. Nor will it solve the problem. Huge fiscal transfers from Germany to Greece may keep Greece on life-support, but will not restore the Greek economy to health. It will not resolve the huge imbalances of productivity and competitiveness between Club-Med and Germany. We are asking Germany to squander trillions of euros not to solve the problem, but merely to kick the can a bit further down the road.
Cameron is asking Germany to bankrupt itself in a futile attempt to sustain an unsustainable currency experiment. It won’t do. It’s time for the EU to cut its losses.
The only permanent solution—which EU leaders cannot bring themselves to admit—is a euro break-up, in as orderly a way as possible. The only way for Greece to recover and return to growth is to default, devalue and restore competitiveness. To do that, it must leave the eurozone—as must all the PIGS.
