Netizen

Thursday, August 09, 2012

Breaking Up The Euro Feels Unthinkable

The solution is to give Europe a political union that matches the monetary union. The continent is going through hard times. But it is not like breaking up the Euro is an easy solution. You could break the Euro and all the problems would still be there. The loans would not vanish.

Tempted, Angela?

it is looking ever more likely .... A chaotic disintegration would be a calamity ..... For the moment, breaking up the euro would be more expensive than trying to hold it together. But if Europe just keeps on arguing, that calculation will change. ..... Begin with Greece. There is a common fallacy, not least in Germany, that dropping the Greeks would be a fairly costless way to teach a useful lesson. In fact the European Central Bank (ECB) owns Greek bonds with a face value of €40 billion ($50 billion), which would be converted into devalued drachma and which Greece might not service. A further €130 billion or so of loans that Greece has received in the bail-out would have to be written down, or written off. The €100 billion of the temporary debts Greece has stacked up in the ECB’s payments system would crystallise into a loss. Add in a one-off grant of say €50 billion to tide Greece over—call it conscience-salving “solidarity”—and the bill might come to €320 billion. Estimating the price of a “Grexit” is guesswork, but Germany’s share might reach €110 billion of this, about 4% of the country’s GDP. ...... Ireland, Portugal, Cyprus and Spain also all owe investors abroad a net sum of 80-100% of GDP (the gross debt is much larger). ...... With the single market in peril and depression looming, Mrs Merkel would come under huge pressure to pay whatever it takes to save the rest of the euro zone. She would have no time to negotiate the pan-European federal discipline that she has always demanded as the price for German aid. A rescue would be a blank cheque. .... A bolder Plan B would amputate well above the site of infection, cutting off Spain, Ireland, Portugal and Cyprus too. Italy, which has net foreign debt of just 21% of GDP, would probably escape the chop: even with its heavy debts and chronic lack of competitiveness, Mrs Merkel would reckon that the euro zone could not function politically without it. ..... When you add up the ECB’s holdings of their bonds, the temporary debts in its payments system, written-off rescue loans, and a care package to soften the blow of being chucked out, the total for Spain, Ireland, Portugal, Cyprus and Greece comes to perhaps €1.15 trillion. Germany would also have to put money into its own banks, hit by losses in the five departing countries. Altogether, this might cost Germany getting on for €500 billion, or 20% of GDP. ..... the euro zone’s members should use their combined strength to create a banking union and to mutualise a chunk of the outstanding debt (as well as introduce policies to temper austerity and promote growth). ..... This more federal Europe would also involve costs. Recapitalising banks and financing a euro-wide deposit-guarantee scheme might cost €300 billion-400 billion, perhaps a third of it paid for by Germany. But this would be a one-off and might be reclaimed from the banks. Mutualising a slug of debt would lift Germany’s interest costs by €15 billion or so a year. The numbers are rough, but, even allowing for some extra loans to the south, rescue would be cheaper than break-up. And that is before you factor in the enormous political costs of disintegration, with, say, Greece departing into a new Balkan hell. ..... had the politicians agreed on who should pay what or on how much sovereignty to surrender. ...... Southern Europe’s economic rot is deepening and spreading north. Politics is turning rancid as the south succumbs to austerity fatigue and the north to rescue fatigue .... breaking up the euro would be riskier than fixing it. ... the choice will be between an expensive break-up sooner and a really ruinous one later.