Franco – German plans for a rump euro beginning
A senior EU official said changing the make-up of the euro zone has been discussed on an "intellectual" level but had not moved to operational or technical discussions, while a French government source said there was no such project in the works.
Such steps are also opposed by many EU countries, whose backing would be needed for any adjustments to the bloc’s treaties, making them anything but a done deal.
"This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years," one EU diplomat told Reuters. "This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it."
It’s about time. I have been saying for some time that the euro zone is coming apart at the seams. This makes a lot of sense. The question is how to do it. Here’s my suggestion from a few days ago:
The ECB’s backstopping Italy and Spain for fear of German and Dutch banks’ insolvency is like the Fed’s backstopping California and New York for fear of Bank of America, Wells Fargo, Citigroup and JPMorgan Chase’s insolvency. It is not a very palatable solution longer-term. Therefore, in the medium-term, the euro area will move to tighter fiscal integration. This may or may not include Eurobonds.
However, not all members will come along for the ride. Angela Merkel, admitting that leaving the euro zone is politically and legally possible during her commentary addressing the Greek referendum in Cannes, has already broken the taboo. Now everyone knows that it is possible to default, leave the euro zone and re-gain competitiveness in a move to a devalued currency. Given the lack of economic harmonisation in the euro area, some euro members will be forced to leave and choose this path. I predict that when Europe moves to change its constitution to include greater fiscal integration, it will also include explicit mechanisms for countries to leave the euro area.
I am glad people are talking sense now. The euro never should have existed. It was totally unworkable from the start. The question should be who stays in a rump euro. Last May I told you how Belgian debt, Italian anarchy and Greek profligacy lead to economic chaos in Europe. And now we’re seeing this plainly.
I say the rump should be Austria, France, Germany, the Netherlands, and Luxembourg. The Belgians are the real problem.
Eventually ERM became the Euro with the Euro’s treaty terms being set in Maastricht in 1992. The problem, at the time, was Belgium. See, the Germans wanted the Belgians in on the currency union. A core of the Benelux states of Belgium, the Netherlands, and Luxembourg along with France and Germany would have suited the Germans just fine.
But, the Belgians had a huge amount of debt – over 100% of GDP. That was a problem, particularly because it allowed the unstable Italians an entree into Euroland. The Germans looked at the Italian Lira as a soft currency and wanted no part of a currency union with the Italians. The Italians seemed to have a different governing coalition almost every year. They were completely incapable of reining in spending and had a weak currency as a result. However, Italy was a founding member of the EU. So, once you let the Belgians in, with their huge debt to GDP burdens, you had to let the Italians in too.
And, once you let the Italians in, well, you had to let in the Spaniards, Portuguese, Greeks and pretty much everyone else.
So, if you have a rump euro, France and Germany need to decide which of the smaller satellite countries get in (Finland, Estonia, Slovenia, Slovakia, Ireland, etc) and whether Belgium is included because the goal is to not have a stable currency union and, I’m sorry, Belgium’s finances and governance are a mess.
P.S. – I’m sure Merkozy will deny these rumours. But they are out there for a reason. the euro is dead and it’s time to prepare for the next stage of the European experiment. First, let’s get ourselves out of this mess though and then we can look to the future.