Telegraph’s Warner on the Euro

It’s too late for Germany to save the euro
Despite belated gestures from Berlin, the single currency cannot
survive if and when Greece leaves it.
Currency in crisis: Greece’s crisis threatens to bring down the euro –
It’s too late for Germany to save the euro

By Jeremy Warner

8:02PM BST 10 May 2012

Greece’s motorcycling Marxist, Alexis Tsipras, makes an unlikely
champion, with his commuter leathers and largely unrealistic Left-wing
views, but he seems to be about the best of a bad bunch right now. As
far as I can see, he’s the only member of the Greek political class
who makes any kind of sense, albeit only marginally so and with one
rather important deficiency.

Rightly, he’s rejected Berlin’s austerity programme as “barbaric” and
counter-productive (though, incongruously, he rides to parliament on a
German-made BMW), but he’s not yet managed to reconcile himself to the
logical corollary of this analysis – that Greece must take back
control of its own destiny by leaving the euro. As it is, the economy
is condemned only to permanent depression.

Youth unemployment in Greece was yesterday revealed to have overtaken
even that of Spain, at an almost unbelievable 53.8 per cent. This for
an economy which, if it sticks to the programme, has a further 150,000
public sector jobs still to shed. Those who think that, with the
requisite degree of structural reform, the private sector will
automatically move in and fill the gap can forget it.

The banking system is insolvent, credit is plummeting, the flight of
capital continues unabated and businesses are going bust in record
numbers. As long as Greece remains in the euro, there is no plausible
path back to growth.

With François Hollande now elected in France, Mr Tsipras seems to
believe there’s a wind of change blowing through Europe that promises
to sweep away the old austerity and replace it with a new era of
fiscal expansionism. He hopes for a kinder, more considerate eurozone
that will allow Greece both to escape austerity and stay within the
single currency. In pitiful defence of their European credentials,
Greeks cling to the dream of the euro, but vote for parties that
repudiate the conditions attached to its membership.
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Cynically, Greece also plays the same old card to win concessions
which it has used since the onset of the crisis nearly three years ago
– keep supporting us, or the chaos caused by disorderly default and
exit will bring you all down.

These threats may well have some validity, but there are only so many
times Greece can call Berlin’s bluff, and I fear they’ve all been used
up. Germany is now fully reconciled to a Greek exit. Wrongly, I
suspect, it also believes the rest of the eurozone is now sufficiently
well prepared to weather the consequent financial maelstrom.

In fact, this would only be the case if the escapees were confined to
Greece, which is most unlikely. Once one country decides to
redenominate as a sovereign currency, the contagion would be
impossible to contain. The already extreme capital flight from other
afflicted nations would intensify until it broke the single currency
beyond redemption.

With this in mind, even Germany has begun to shift its message in
recent days. Wolfgang Schäuble, the German finance minister, actually
showed some sign of understanding what the euro crisis was all about
last weekend, when he suggested it might be a good idea for Germany to
experience a little wage inflation in the interests of stimulating
domestic demand and helping to resolve imbalances. This seeming heresy
has since been repeated by the Bundesbank, which has signalled it
might be prepared to accept higher inflation in Germany as a way of
boosting the competitiveness of those countries worst hit by the debt
crisis.

Could it be that Mr Tsipras, cheered by the socialist presidential
victory in France, is actually on to something in believing he can
defy the terms of the bail-out and still remain in the euro?

Throughout the crisis, Germany has in truth been more accommodating
than it seems in trying to hold together this French-inspired,
economic folie de grandeur. It’s agreed to prop the region up with
bail-outs, and it has put hundreds of billions of its own surplus
savings on the line by providing the periphery banking system with the
liquidity it requires to stay afloat. Now its policymakers seem to
suggest they are even prepared to make Germany a little less
competitive so that the afflicted nations can become more so. It’s
certainly a step in the right direction, but it is also too little,
too late.

If such an approach had been applied two years ago, it might have
helped, but the scale of the internal adjustments needed in the
deficit nations to regain competitiveness is just too big now to be
cured by small increases in German demand. The die has been cast.
Besides, it’s not at all clear Germany really means it.

Berlin hosts Mr Hollande next week. Thus, the sudden outbreak of
growth-friendly rhetoric is in all probability more about diplomacy
than hard intentions, or about building bridges with a man who in
opposition was seen as a threat to the traditional Franco-German
relationship. That Germany is prepared to engineer the rip-roaring
boom necessary to pull the periphery out of depression seems somewhat
improbable. Like the promise of a growth compact to supplement the
austerity of the fiscal one, it’s all just words.

Don’t get me wrong. Europe desperately needs structural and labour
market reform to make it more competitive, and for some countries to
root out institutionalised tax evasion and corruption. Devaluation
cannot in itself provide a long-term fix – many other things need to
happen too. But it does at least promise a new beginning, which the
present axis of despair does not.