Saturday 15 December 2018

David McWilliams: Germany profited in boom so must deal with the bust

It is now down to Germany. Does it want to save the euro or not? If it does, it will have to underwrite the Irish along with the Italians, Spaniards and a few others besides, not to mention the Greeks.

If it doesn't want to save the euro, it will have to deal with a rapidly rising new deutschemark, which will soar in value against every currency -- not just in Europe but against every currency in the world. In fact, the blueprint for Germany is Switzerland, and last week the Swiss National Bank responded to the rising Swiss franc by capping its rapid appreciation because it is hurting Swiss industry. A post-euro Germany with the new deutschemark would be like the Swiss Franc on steroids. It would be like a massive Switzerland in the heart of Europe with a hugely overvalued currency.

The reason for this is that everyone would seek the "safety" of the new deutschemark as the new currencies or new blocs of new currencies fall in value, trying to find their new level. For the European economy to work properly, the rest of Europe would have to be much cheaper than Germany.

In the event of a euro collapse (which is no longer that unimaginable), strategically, Ireland would be in a better position than say Spain or Italy because our natural home would be with sterling -- as it has always been. Yes, the new Irish punt would fall dramatically, as it should do. The basic rule of economics is that weak economies should have weak currencies and vice versa. However, with an implicit link to sterling, rather than an explicit exchange rate target, there will be a level against sterling where the market will buy punts again. Things will settle down -- as they always do.

In Ireland, although there would be one new currency, there would in effect be two. There would be one currency for transactions -- a new punt -- and one for savings, the new deutschemark. In this post-euro world, people with savings will try to convert their punts into deutschemarks, as happened when the euro was introduced in 2000. Over time, as the new currency becomes more credible, savings will flock back to the punt because interest rates in punts will be much higher than those of the deutschemark.

Changing the currency that people "transact" in is nothing new. For example, there have been four different currencies circulating in this country during my lifetime. When I was a very young boy, we had pennies with big hens on them, the old pre-decimal currency. Then we had a new decimalised currency with totally different denominations and shapes and sizes. People adapted quickly, even though this was in a decade when inflation was raging. Then we changed currency again in 1979, breaking a monetary union with Britain, which was centuries old. (This new monetary union with Germany is only 11 years old).

We introduced a new currency with a new name -- the punt -- which no one had ever heard before. Official Ireland claimed that this would be a "strong" currency but in fact it devalued five times in its first 14 years! Then in 2000, we introduced the euro. So that's a currency for every decade of my life! These things happen and have happened. In Europe, following the end of the Soviet Union, close to 20 new currencies were issued between 1990 and 1992! Changes are not without cost, but they happen. Currencies change, that's the lesson of history.

There is no reason for the euro to be any more permanent that the others . . . or is there?

Of course there is. At the outset, the euro was seen as a political initiative that would force all the economies of Europe together. In the context of political integration, this wasn't a bad idea, except that not all economies were suited to it and not all countries wanted it. Of the three countries that joined the EEC in 1973, Ireland, the UK and Denmark, only Ireland joined the euro. The other two opted to keep their currencies having done rigorous analysis of their trade and investment patterns. So too did Sweden.

Despite what you hear from "serial integrationists" now about the link between the euro and the EU, Britain, Sweden and Denmark all remain members of the EU. Are they any the less European for having their own currencies?

The main beneficiary of EMU was the dominant industrial nation in Europe: Germany. It could export all it liked to the rest of Europe with no exchange rate risk and, more importantly, no political ramifications. Germany got a free lunch, which was paid for with borrowed money by the rest of Europe. But who lent this money to the rest of Europe? Why Germany of course! So Germany was lending money to the poorer EU countries in order to give them the wherewithal to buy German goods, which had generated the German savings in the first place!

When these countries had difficulty paying back the German banks, what did the Germans do? They penalised them in the draconian terms of the EU "bailout". Instead of acknowledging its own role at the centre of this European-wide Ponzi scheme, Germany initially played the role of major loan shark, borrowing at 2pc and lending to the distressed states at 6pc! This penal approach didn't work because the balance sheets of the distressed countries were too weak to pay this money back and the crisis became more acute. The "patched up" solution of a few months ago is unraveling.

We are at the brink. The Germans have four choices: (1) take the losses their banks will suffer on the likes of Greece and Ireland, Spain and Italy on their own balance sheet; (2) force their own banks to take the hit for their reckless behaviour; (3) allow Greece to default -- which would give "permission" to the rest of us to default; or (4) force the Greeks out of the euro which would lead to the unravelling of the currency.

Angela Merkel knows that the German public doesn't want to pay for anyone, particularly the Greeks, who have been viciously caricatured in the German tabloids. She also knows the end of the euro would knock the shine off European integration, but then again she is not Helmut Kohl -- a war survivor and driver of EU integration. Ms Merkel is an East German, fluent in Russian not French -- a different kettle of fish altogether. She also knows that if she bails out Greece or anyone else with German money, she loses the next election. So what do we have? A stand-off as politicians have no idea what to do next.

As for Merkel and Germany, their role in this debacle is clear. They benefited from the boom and now, naturally, want to insulate themselves from the consequences. But they can't have it both ways.

As Duc de Levis, a staunch enemy of Bonaparte, himself an earlier champion of European integration, said: "To govern is to choose."

Your choice now, Angie.

David McWilliams has devised and will teach a new economics diploma, Economics Without Boundaries, from September 27. See or

Irish Independent

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