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Saturday 23 August 2014

David McWilliams: Closer ties with Britain offer us a way out of our euro nightmare

Published 13/06/2012 | 17:00

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We have a better chance of winning our group in Poland than the euro has of surviving in its present form.

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The currency may survive but not as it is at the moment. The total failure of the huge Spanish bank bailout changes the game because it signals the end of the easy options for Germany which must face up to how much it will cost to hold the euro together.

It is important to appreciate that this is not a fire drill. You know the way we Irish are with fire alarms? We pretend that someone must be messing about as the alarm couldn't possibly suggest that there is anything to worry about, could it? We don't have to evacuate the building because it must be just a joke, surely?

This is not a joke. It is deadly serious. According to Reuters yesterday, European finance officials are discussing limiting ATM withdrawals in Greece as well as introducing capital controls in the event that the Greeks vote this weekend for parties that want to tear up the bailout agreements.

We now have Spanish and Italian bond yields soaring, despite the €100bn bailout for the Spanish banks.

Remember the Spanish PM Mariano Rajoy, as recently as May 28, insisting: "There will be no Spanish banking rescue." And what about the European Banking Authority stress tests last year which prompted Spain's central bank governor to claim that there was no need to inject further capital into Spanish banks? It was all bogus.

No one believes a word that comes out of EU officialdom because they are making it up on the hoof. There is no plan and alarm bells are ringing all over the place and they claim there is no exit.

Up to now, the EU's strategy has been described ad nauseam as "kicking the can down the road". The strategy was to try to patch things together and hope that something would turn up. Well this week's events in Spain reveal that the policy is less akin to kicking a can down the road and more like rolling a snowball down a hill. The more you roll, the more the snowball builds momentum, getting bigger and bigger, heavier and heavier until what was a tiny snowball builds and builds into something enormous and out of control ready to smash into something.

The key is the decision of Germany. Is it about to put itself in a huge hole for the rest of the eurozone? Could Merkel sell a deal to the German people which risks infusions of German cash for generations to countries such as Spain, Ireland and Italy, not to mention Greece?

If Germany decides to pull the plug, where does it leave us? Would we go it on our own? Or would we join a weaker euro bloc with Spain and Italy? Or would we opt for a new punt nestling in the shadow of sterling?

If you believe that the euro is 100pc secure, then you should stop reading now. However, if you think that there is a chance that the euro will, under the pressure of defaults and economic stagnation of the periphery, have to be changed, then stay with us.

The epicentre of the crisis is Germany, not the periphery, because Germany is the only country that will or can save the project. It is easy to say that Germany has profited from the euro and therefore it should pay the price now in transfers to the south and the west. But let's think about things from a German point of view.

They will have heard a former Portuguese communist, Manuel Barroso, talk of the immediate need for a banking union. But as one German diplomat, quoted anonymously, said yesterday: "How can we have a banking or fiscal union with France which this week decided to bring its retirement age down to 60, when we decided to increase ours to 67?"

The Bundesbank was out of the blocks early on the banking union idea, dismissing it as not workable. Germany wants hard money not some fungible commodity that can be printed when the situation demands it.

Germany is a nation of savers and therefore they want to ensure that the currency they are using is a safe place to store their wealth. For them, a soft euro, made softer by printing money to bail out peripheral debtors, is not an option. They wanted the rest of Europe to be more German and thought the single currency would enforce discipline. But who ever suggested that the way to enforce financial discipline was to give those you are trying to discipline the pin number of your ATM? This is what Germany did when it joined the euro and the Spanish, Greeks, Italians and Irish withdrew as much cash as they could. The euro didn't discipline the rest of Europe; it gave us all a free lunch -- which now we can't pay for.

The only real way to protect German savings is for them to pull up the drawbridge around a hard euro of Germany, Benelux, Finland, Austria and France.

Otherwise, the eurozone will end up like the Italian state where the prosperous north of Italy infuses cash to the Mezzogiorno indefinitely. Germany already operates such transfers from west to east Germany but, like the Italian example, the Germans are the same nation. Europeans are not.

If the Germans move to protect themselves and decide to put further European integration off for another generation because the place isn't ready for it, what then for Ireland?

It is clear we would not be in their Premiership but would be relegated to the second division with Spain and Italy. Then do we join a currency union with the Mediterranean or do we choose to revert to the punt but with the understanding that we shadow sterling, our natural ally, our main trading partner and home to the majority of our emigrants?

Just to give you an idea of how inappropriate a link with the soft euro would be over and above a link with Britain, consider this: 51.2pc of all our imports from the EU come from Britain, excluding Northern Ireland, as opposed to 2.9pc and 2.4pc for Italy and Spain.

Initially we wouldn't explicitly link to sterling, as this would only give speculators a target. There would be no need to explicitly tie the punt to sterling but it could behave more like the Swedish krona or Danish krona. Indeed, in the future, closer financial links with Britain and the three floating currencies of Norway, Sweden and Denmark, might make more sense than another supposedly irrevocable monetary union with Italy and Spain.

The crisis in Europe is not a drill. It is real. We would better be drawing up plan B pronto. By 2016, 100 years after the Rising, will we be closer to Britain than any of us expected?

David McWilliams will be among the speakers at the Dalkey Book Festival this weekend. www.dalkeybookfestival.org

Irish Independent

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