There are only two outcomes to the eurozone crisis: either it breaks up and the countries go back to using their own currencies, or there is a federal Europe with a centralised fiscal policy laying down tax and spending rules, common social and labour policies and issuing eurozone bonds.
Many in the markets, looking at the scale of distress and punishing spreads, are predicting the former arising out of a total meltdown.
The Banker, with an eye to the political imperative, opts for the latter outcome, though heavily disguised to make it palatable to both German taxpayers funding the bailout of profligate nations as well as the citizens of those same countries who will now be receiving policy orders ostensibly from Brussels (or in reality from Berlin).
Economists famously get things wrong by misunderstanding politics. The euro was always a political project and never made sense economically – a common monetary policy without a common fiscal policy was doomed to failure. The late monetarist Milton Friedman said it would not survive a major economic crisis. He expressed some of his euro reservations in comments written for The Banker back in 2001 on the occasion of our 75th anniversary.
But just as the euro was a political conception, so will its survival be due to political considerations – quite simply the loss of face and the disruption that would be caused by a break up is too much for European politicians to contemplate.
Germany clearly failed to understand that sharing a currency with less parsimonious countries means that eventually it would take on their liabilities. Portugal and Greece did not appreciate that while adopting the euro allowed them short-term economic gains, they were also signing away their sovereignty.
Now the trade is simple: German largesse in exchange for a federal Europe, which, by the way, will delight tax-paying sections of the business communities in Greece and Portugal, who would prefer to be ruled by the EU rather than suffer the dead hand of their own sclerotic administrations.
