It’s too late for Germany to save the euro

ΠΗΓΗ: The Telegraph

by Jeremy Warner

Greece’s motorcycling Marxist, Alexis Tsipras, makes an unlikely champion, with his commuter leathers and largely unrealistic Left-wing views, but he seems to be about the best of a bad bunch right now. As far as I can see, he’s the only member of the Greek political class who makes any kind of sense, albeit only marginally so and with one rather important deficiency.

Rightly, he’s rejected Berlin’s austerity programme as “barbaric” and counter-productive (though, incongruously, he rides to parliament on a German-made BMW), but he’s not yet managed to reconcile himself to the logical corollary of this analysis – that Greece must take back control of its own destiny by leaving the euro. As it is, the economy is condemned only to permanent depression.

Youth unemployment in Greece was yesterday revealed to have overtaken even that of Spain, at an almost unbelievable 53.8 per cent. This for an economy which, if it sticks to the programme, has a further 150,000 public sector jobs still to shed. Those who think that, with the requisite degree of structural reform, the private sector will automatically move in and fill the gap can forget it.

The banking system is insolvent, credit is plummeting, the flight of capital continues unabated and businesses are going bust in record numbers. As long as Greece remains in the euro, there is no plausible path back to growth

With François Hollande now elected in France, Mr Tsipras seems to believe there’s a wind of change blowing through Europe that promises to sweep away the old austerity and replace it with a new era of fiscal expansionism. He hopes for a kinder, more considerate eurozone that will allow Greece both to escape austerity and stay within the single currency. In pitiful defence of their European credentials, Greeks cling to the dream of the euro, but vote for parties that repudiate the conditions attached to its membership.

Cynically, Greece also plays the same old card to win concessions which it has used since the onset of the crisis nearly three years ago – keep supporting us, or the chaos caused by disorderly default and exit will bring you all down.

These threats may well have some validity, but there are only so many times Greece can call Berlin’s bluff, and I fear they’ve all been used up. Germany is now fully reconciled to a Greek exit. Wrongly, I suspect, it also believes the rest of the eurozone is now sufficiently well prepared to weather the consequent financial maelstrom.

In fact, this would only be the case if the escapees were confined to Greece, which is most unlikely. Once one country decides to redenominate as a sovereign currency, the contagion would be impossible to contain. The already extreme capital flight from other afflicted nations would intensify until it broke the single currency beyond redemption.

With this in mind, even Germany has begun to shift its message in recent days. Wolfgang Schäuble, the German finance minister, actually showed some sign of understanding what the euro crisis was all about last weekend, when he suggested it might be a good idea for Germany to experience a little wage inflation in the interests of stimulating domestic demand and helping to resolve imbalances. This seeming heresy has since been repeated by the Bundesbank, which has signalled it might be prepared to accept higher inflation in Germany as a way of boosting the competitiveness of those countries worst hit by the debt crisis.

Could it be that Mr Tsipras, cheered by the socialist presidential victory in France, is actually on to something in believing he can defy the terms of the bail-out and still remain in the euro?

Throughout the crisis, Germany has in truth been more accommodating than it seems in trying to hold together this French-inspired, economic folie de grandeur. It’s agreed to prop the region up with bail-outs, and it has put hundreds of billions of its own surplus savings on the line by providing the periphery banking system with the liquidity it requires to stay afloat. Now its policymakers seem to suggest they are even prepared to make Germany a little less competitive so that the afflicted nations can become more so. It’s certainly a step in the right direction, but it is also too little, too late.

If such an approach had been applied two years ago, it might have helped, but the scale of the internal adjustments needed in the deficit nations to regain competitiveness is just too big now to be cured by small increases in German demand. The die has been cast. Besides, it’s not at all clear Germany really means it.

Berlin hosts Mr Hollande next week. Thus, the sudden outbreak of growth-friendly rhetoric is in all probability more about diplomacy than hard intentions, or about building bridges with a man who in opposition was seen as a threat to the traditional Franco-German relationship. That Germany is prepared to engineer the rip-roaring boom necessary to pull the periphery out of depression seems somewhat improbable. Like the promise of a growth compact to supplement the austerity of the fiscal one, it’s all just words.

Don’t get me wrong. Europe desperately needs structural and labour market reform to make it more competitive, and for some countries to root out institutionalised tax evasion and corruption. Devaluation cannot in itself provide a long-term fix – many other things need to happen too. But it does at least promise a new beginning, which the present axis of despair does not.