Astride the Chasm

The bond markets have calmed a little this morning after Spain elected a government with the mandate for cutting Spain’s deficit but this snippet of news should be treated with caution. The chasm opening up within the euro zone could become a long deep depression for Europe with a credible risk of bringing down the entire global financial system. When David Cameron and Angela Merkel met last week they represented the two sides of Europe; Merkel for the 17 countries in the Euro zone and Cameron for the 10 EU countries outside. They tried to find common ground but failed. Europe’s politicians stand astride tectonic plates as they slowly move apart. Each time the earth moves, their legs open a little wider until they are stretched so wide that it becomes impossible to step back onto one side or the other. They must decide which side of the divide they choose or risk being dashed on the jagged rocks below.

Angela Merkel wants to rescue the euro zone without Germany paying the price. For a single currency to work requires that rich regions transfer capital to poorer regions. Within a country with a single currency like the UK, the government transfers funds from the relatively rich South East region to the North East and other relatively deprived areas. In the United States, there are mechanisms that transfer funds from strong to weak states. Germany has done well out of the euro; its strong export-led growth has been driven by an exchange rate that is much lower than it would have been had Germany retained the Deutsche Mark. For the euro to survive intact requires closer integration between euro zone countries which should include transfers from the strong to the weak, from North to South, from Germany to Greece.

The popular view in northern Europe is that the hardworking and frugal Germans should not have to bail out the spendthrift and lazy Greeks but these stereotypes do not give the full picture. Germans and Greeks are not the same; there are deep cultural differences between Teutonic northern European values and laid back Mediterranean ways of living. This is part of the rich tapestry of Europe to be retained and celebrated not forced into some sort of homogenised amalgamation of European values.

Germany cannot have it both ways; reaping the benefit whilst avoiding paying the price. There are two options: to draw the euro zone together into a federal structure with all the responsibilities that implies, or to dismantle the Euro – fully or in part. Whilst politicians pursue a third way, of fudging the issue, they make their lives easier from one meeting to the next, from one week to the next, but the crisis gets deeper and the resolution harder.

Europe’s politicians should stop trying to hold Europe together with parcel tape; it won’t work. Clear-eyed analysis and bold decisions are required. A sustainable Europe needs a series of credible currencies that reflect the diverse nature of Europe. The euro will have to be split; the only question is into how many bits.