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Eurozone. An analysis

This is an excellent analysis of the eurozone crisis. I think it should be understood that the intention of this is not to absolve the PIGS of blame but to seek to redress the balance. I am never sure about copyright rules on the net and whether i should credit this or not, but here goes…

Low interest rates and booming property prices are down to southern pain, not hard work
he Greek general election on June 17 is, according to Alexis Tsipras and his anti-austerity Syriza party, a vote on whether or not Athens should continue with painful spending cuts and tax increases. Angela Merkel and her German colleagues have a rather different view.
To them, the election is a referendum on Greek membership of the euro. Should the Greeks reject the demands of their northern European creditors, Athens would have to head towards the door marked “euro exit”. The remaining eurozone nations could then breathe a sigh of relief and return to business as usual.
Greece has become a convenient scapegoat. Yet to blame Greece alone for the eurozone’s woes is absurd. Plenty of other nations have broken the fiscal rules. And there has been no shortage of sins of omission.
One of the biggest such sinners is Germany. Its politicians have yet to realise that its economic success — exports of BMWs, Miele dishwashers and swanky kitchen cabinets alongside seemingly robust domestic demand — has been fuelled in part by the crisis. By not acting sufficiently to stabilise the eurozone, Germany is contributing to the worsening crisis yet reaping serious short-term benefits along the way.
With more and more people fearing the euro’s demise, they’ve taken their funds north. They’re assuming that, in the event of a break-up, the German bit of the euro would appreciate against the southern bits. Unwittingly, however, they are contributing to a creeping geographical bank run. In 2007 it was Northern Rock. In 2012 it’s southern crocks. Southern Europe’s pain is Germany’s gain.
German long-term interest rates have plunged to a ridiculously low 1.46 per cent, below the two “safe havens” of the US and the UK. This has spurred domestic credit growth, even as the rest of the eurozone has had to live with a credit crunch. And with easy credit, German property prices are rising, a phenomenon not seen in more than a generation.
Pre-euro, this capital flight would have led to rapid appreciation of the German mark, the investor’s way of wiping the smile off the typical German exporter’s face. The single currency, however, doesn’t allow for such a sudden reduction in competitiveness. Today, capital flight is a virtually costless windfall gain for Germany.
To fix the eurozone’s problems, Germany demands that southern Europeans put their financial houses in order, as if it has no responsibilities itself. The prescription is austerity, the financial equivalent of medieval leeching. Austerity is supposed to deliver smaller budget deficits, lower government debt and, through cuts in prices and wages, a big improvement in competitiveness. Price and wage cuts, however, make it more difficult for debtors to repay their creditors, increasing the risk of default. And the solution to this? More austerity . . .
Austerity is not the answer. As investors lose faith in the eurozone’s future, the capital flight simply intensifies. This must be reversed. And that means Germany will have to accept its share of the burden, whether it likes it or not. Either the euro stays intact, in which case German interest rates will have to end up a lot higher than they are now, or the euro falls apart, leading to a huge appreciation of the German currency and a significant loss of competitiveness. Whatever the outcome, Germany will ultimately be confronted with a bill.
Successful monetary unions are, in one form or another, successful fiscal unions too — which means national sovereignty is sacrificed for the greater good. Eurozone nations don’t have to go as far as full union but they could go further in the direction of pooled sovereignty. They could agree on issuing common eurozone bonds, reducing borrowing costs for countries in the periphery while, rightly, increasing German borrowing costs.
Berlin objects on grounds of moral hazard, worrying that fiscal discipline would then head straight out of the window. But, if the euro is to survive, Germany will have to stop pretending that its success is solely the result of good domestic management and hard work. It isn’t. Germany has lucked out as a result of the crisis. Berlin must share its good fortune with its eurozone partners, unequivocally and without moral judgment.
The alternative is to head back to economic conditions last seen before the industrial revolution. Then countries got richer only at the expense of others. War, colonisation and slavery were all neat ways of expropriating wealth from other parts of the world. None of that is now taking place in the eurozone, thank goodness, but capital flight is delivering a similar outcome. Countries in southern Europe will find themselves for ever shut off from global capital while Germany is up to its eyeballs in the stuff.
This is unsustainable. Germany must declare whether it is prepared to make the necessary sacrifices to save the euro. Otherwise, when the history is written, Germany’s sins of omission will surely be seen as one of the key reasons for the euro’s eventual collapse.

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