Tag Archives: break-up

Dear Germany, You Are Deciding the Future of Europe

Dear Germany,

The last two decades were very good for you. You were able to unify your divided territory and your people. You had your fair deal of growth and expansion of trade. You began to “normalize”, as experts say.

Today you have to solve a great problem. It is up to you to decide whether the eurozone project lives or dies. I will not go into the details of the problem and the possible solutions. In any case you know very well what is at stake and what the options really are.

But why should you choose to save the euro? Well, two reasons spring to mind. First, a breakup of the eurozone will be very messy and will likely hurt your banks, pension funds and ultimately – your own citizens. The breakup will negate some of the important benefits of the internal European market and will cause widespread economic troubles around the whole world.

Second, killing the euro will go against your own obligations. When you founded the eurozone you also agreed that any amendment of the rules of the EMU will go through an amendment of the Treaties. That means that countries such as France and Belgium must explicitly agree to the eurozone breakup, and I sincerely doubt that they would. So in case you want to print Deutsche Marks again, you will have to infringe the Treaties in a very blatant way.

If the internal political pressure is really high you might probably risk and do it. But going against the founding principles of the European Union will have a very high price for you. One of the reasons for the unification back in 1990 was that you were securely integrated in the European Community. Yes, you are very different now and yes, you are rightly demanding a stronger voice in the world affairs. But still – there are ambiguous feelings in Europe about a strong and expansionistic German economy, especially if combined with a rapprochement with Russia. You need to think carefully about those considerations.

Whatever you decide to do, I would strongly advise talking sincerely with your own people. Cheap propaganda about the lazy Greeks may sell the newspapers, but we’re not talking about entertainment here. Your choices will define the future of all European citizens, and that means Germans as well. The European Union will never be the same after the breakup of the eurozone, and you will not enjoy the position that you have now.

Please think carefully before making your decision. The world will not end with the euro, but it will be an uglier place.

Best regards,

Vihar Georgiev

 

 

The Technicalities of Eurozone Breakup

The concept of eurozone breakup is not new, and I have mentioned it before. But now more and more voices warn of this threat. One important observer of European affairs, Gideon Rachman, says that the single currency will indeed eventually break up – and that the euro’s executioner will be Germany. On the other hand a prominent US economist, Barry Eichengreen, says that the euro is an example of a path-dependent historical process that is unlikely to be reversed. None other than Angela Merkel said that “if the euro fails, then Europe fails”. But is this really true?

The markets signal mistrust. Even Mrs. Merkel admits that the eurozone is facing “an exceptionally serious situation”. In any case the possible breakup of the eurozone is a matter of speculation.

That being said, there’s not much discussion on the technicalities of the eurozone breakup, and that is a hugely important aspect. It is very important mainly because of the legal basis of the eurozone and its structural place in the legal framework of the European Union.

Barry Eichengreen again is probably the only person who wrote a whole scientific paper on the subject, claiming that the technical difficulties would be quite formidable. He notes that redenomination in national currencies may pose some real difficulties, especially in determining the scope of redenomination. But his analysis focuses mainly on the exit of a single country or a group of countries from the eurozone, and not on the breakup of the eurozone as a whole.

More recently Wolfgang Münchau and Susanne Mundschenk have written an analysis for Eurointelligence that considers the legal implications of both the exit of a single country from the eurozone, and the breakup of the eurozone altogether. The authors note that the European Treaties have no provision for an exit clause from the euro area, just as there is no provision for an exit from the CAP. They claim that it is virtually impossible for a member state to leave the euro area, devalue, and remain in the EU. They also dismiss the argument that Germany’s persistent trade surplus will eventually cause the collapse of the euro area. But in their paper they do not consider the technicalities of a possible breakup if it occurs.

The truth is that the breakup of the eurozone goes through a Treaty amendment. This may be a simplified procedure (art. 48, para. 6 TEU) since the provisions on economic and monetary policy are in part III of TFEU, and the breakup of the eurozone does not increase the competences conferred on the EU. Such a breakup is only possible through a unanimous decision of the European Council, though. That means that all member States must agree on the dissolution of the Economic and Monetary Union in its present form. The real challenge will be to agree on initial redenomination rates.

However unlikely that is, I would like to point out that there is, indeed, a legal mechanism for the breakup of the eurozone. This breakup will only happen if all Member States agree that the euro is not a sustainable currency. To me it sounds much easier to prevent this breakup from happening in the first place. But should Member States fail to act on the euro crisis, a breakup of the eurozone remains legally and technically possible.

As for the claims that if the euro fails, then Europe fails, I disagree. It is better to have limited, but consensual integration process, than to have secession or atrophy.

 

 

A Stupid Question: Will the Eurozone Really Break Up?

Yes, many will argue that’s a stupid question. Yes, leaving the eurozone will be very costly for any party involved. But I begin to wonder.

There’s the rumour that French President Nichlas Sarkozy threatened to pull France out of the euro if Germany refused to provide financial assistance to Greece. But that’s part of a broader story.

The main issue is the price of stabilization, not the bailout price. That’s what Albert Edwards, the Societe Generale SA strategist, said a while ago. He said that unlike Japan or the U.S., Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain.

The point is that it’s not about Germany refusing to play its traditional role and make concessions. It’s about the inability of governments to sell sufficient austerity measures to their publics.

Former Federal Reserve Chairman Paul Volcker has also warned about potential disintegration of the euro; there are other voices warning about it.

In such cases I always go back to the eight Eurointelligence scenarios for the “euro meltdown”. Today it is not funny to read.