Sunday 23 October 2016

We best get working on a Plan B as the next recession will kill the euro

Published 15/07/2015 | 02:30

German Chancellor Angela Merkel leaves a news conference at the end of a eurozone leaders summit in Brussels on Monday. Photo: Reuters/Philippe Wojazer
German Chancellor Angela Merkel leaves a news conference at the end of a eurozone leaders summit in Brussels on Monday. Photo: Reuters/Philippe Wojazer

The euro is one recession away from implosion and its architects know this. The next time the European economy slows down, this thing will blow apart. Indeed, it might not necessarily need a continent-wide downturn for the next fracture.

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We, in Ireland, should be prepared for this eventuality.

Before we discuss the economics and politics of the past few days, let's examine the appalling management of the euro system. Remember this is a currency with aspirations of replacing the dollar as the world's number one means of payment.

You wouldn't run a corner shop the way these bureaucrats try to run the currency. Have you ever seen a worse management style than staying up half the night to make mega-decisions at dawn? If the board and management of a public company dealt with problems like this, the share price would collapse. There is quite simply no corporate governance within the euro; the way the system arrives at decisions is both laughable and terrifying.

Consider the bizarre suggestion tabled last Sunday that the Greeks should have a temporary euro "until we see where we are". Was this a joke? It was in fact proposed at the 11th hour.

Make no mistake about it, Greece was politically crucified on Monday and this grisly spectacle was cheered on by our own Pharisee political class. In true Biblical fashion, after his surprise Palm Sunday triumph last weekend, Tsipras found himself isolated, alone and impaled by Friday without even a thieving Barabbas for company.

The crucifier, Germany, is now clearly out of control, but who is going to rein the Germans in?

In the old days, France used to be strong enough to stand up to the Germans but this is not the case any longer. France is enfeebled and its president has neither the credibility of Mitterand or Chirac nor the chutzpah of Sarkozy.

The British, who were also an extremely cussed counterweight to Germany, are now on their way out of the club. They can't be bothered. Britain may leave the EU at the mercy of the Germans and, believe me, the smaller EU countries will come to miss the Brits and their stubborn but oddly principled scepticism.

This weekend in Brussels we saw a Teutonic kangaroo court dressed up as European diplomacy and it simply reinforces the position of the Eurosceptics in the UK ahead of their referendum. When/if the British go, others will too.

A reasonably successful Britain outside the EU will prove to lots of others that the Swiss/Norwegian/British approach - trading freely in a growing global economy - is a lot more pleasant than being a ward of Germany.

Look at Greece. It was given conditions that it simply couldn't meet and remain sovereign. This is the new reality. This is the implication of German rule. It seems to me that German financial vindictiveness was in response to the Greek electorate having voted No in the referendum. If this interpretation is accurate, we should all be scared, very scared indeed.

When economic negotiations stop making economic sense, you should begin to question the motives of the EU.

So for example, how could the Greeks, or anyone who understands the basics of a broken balance sheet, accept the German insistence that the Greeks hive off €50bn of State assets, put them off-shore and sell them to the first vulture fund that rocks up? How can such financial nihilism make the balance sheet better?

Explain to me how selling valuable assets at a deep discount in order to pay worthless liabilities at a steep premium can improve the balance sheet?

Now let's consider the deal itself. It leaves Greece humiliated and with no autonomy. How much more will the economy contract? And when the economy shrinks, what happens to politics in Greece? Does it shift to the Left or Right? One thing is clear, it will hardly return to the centre.

We know that the economy has shrunk every time there has been a bout of austerity and we know that every time it shrinks there is a move to the Left and the Right. Remember Syriza is the consequence not the cause of Greece's problems.

Greece's problems - like those of Italy, Spain and Portugal - stem from decades of mismanagement and borrowing in the periphery and years of complacency and reckless lending from creditors.

This brings us to what happens next on the periphery.

Five years ago when the inflexible Trichet was at the helm of the ECB, I was sure the euro was on the verge of collapse. I was wrong because his successor Mario Draghi, sensing that the system was about to implode, started printing money and buying up the IOUs of the peripheral countries. He did this with German blessing because the Germans understood that although it can bully Greece, Italy and Spain are a different matter.

Draghi and Merkel maintained the line that the euro was forever.

This line has now shifted dramatically. The euro is now officially conditional. Countries that don't play ball with Germany will see their banking system used against their democratically elected politicians. The banking system is the soft underbelly and the Germans are prepared to orchestrate bank runs in member states to get their way. This is not only new, it is outrageous.

Italy, Spain and Portugal are next. They all have enormous debts, deficits, insufficient growth and mass unemployment. They can't compete with the Germans - they don't have the industrial strength - and as a result, their living standards are rented not earned.

They are large versions of Greece.

The financial markets now know that the euro is conditional and understand that there is a significant political groundswell in Germany to push countries out if needs be.

If central bank support for bonds of quasi-bankrupt countries that can't even balance their books day-to-day are conditional, then why hold them?

The next time there is a slowdown in Europe, all these factors could come together in a perfect storm.

In addition, with the British on their way out, the world will ask who is next? The world will be looking at us.

What happens here, if all this happens when rates are rising because the overheating German domestic market demands it? Would you want to be a tracker mortgage holder in these circumstances?

What do we do then? Will we be stranded in the mire of groupthink or will we use the next few months to come up with a Plan B?

Irish Independent

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