Posted by: Dirk | December 11, 2011

‘Merkel saves the euro crisis’

I stole the above headline from the tageszeitung (pdf), where it reads Merkel rettet Euro-Krise. Kevin O’Rourke has an excellent article on the results at Project Syndicate. Here is his conclusion:

This summit should have proposed institutional changes to avert such a scenario. But if such changes are politically impossible, and the euro is doomed, then a speedy death is preferable to a prolonged and painful demise. A euro zone collapse in the immediate future would be widely perceived as a catastrophe, which should at least serve as a source of hope for the future. But if it collapses after several years of perverse macroeconomic policies required by countries’ treaty obligations, the end, when it comes, will be regarded not as a calamity, but as a liberation.

And that really would be worse.

I think he is right about seeing a euro exit as a liberation, but then I do not agree with the idea that it would be worse than an immediate collapse. The reason is that right now the European people do not understand the crisis sufficiently to be able to draw conclusions from its downfall.

Angela Merkel and other conservatives can claim rightfully to have constructed the euro. It was based on conservative thinking at that time, mainly that markets are right and governments are wrong. Hence government debt was heavily regulated, and the financial markets were given a free run. Real estate bubbles happened where Europeans were unaware of the consequences of too much debt (mostly because they had not had access to abundant credit before) and where regulation and oversight were weak. Many Spanish real estate tycoons were quite popular as presidents of Spanish football clubs, among them Real Madrid, before the crisis hit.

The crisis has shown that European financial market participants, mostly banks, invested unwisely. Financing real estate bubbles in Ireland, Spain and the US hundreds of billions were turned into non-performing loans. This is the euro zone’s problem, not Greek government debt. The fact that this needs to be repeated even today brings me back to my main thought. The European public has not understood what this crisis is about. If it would, the ratings for Merkel’s party would plummet quickly, although other parties like Socialdemocrats and Greens would share the burden as well.

Therefore, an exit from the euro now would mean that a) the European public (a.k.a. future voters) does not sufficiently understand the euro crisis and b) those that have through their policies contributed to the crisis are still in power and will get to redesign the problem if the euro breaks up now. That would very likely lead to national currencies, since the fiscal union has been the problem the whole time. The other option, a change of European rules to save the euro – a real reform project, and not some ballyhoo with results clouded in almost Orwellian euro speak – would probably be out of reach if the euro were to fail before the German (and French) elections of 2013 (and 2012).

Of course, any new loan to Greece is in fact a fiscal transfer. We have known that since April 2010 from the arithmetic of debt. If that is so and more money will be sunk in Greece and other countries, consider it as tuition for public education. Perhaps you think I am cynical, but the opposite is the case. The European public still has not understood the crisis, and it needs to do so before we get to rewrite the rules of Europe. If along the way some billions are spent to support some of the people affected in the worst way by the crisis, is it really that bad?

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