Having been an early supporter of the euro, I now consider my engagement to be the biggest professional mistake I ever made. But I do have a solution to the escalating crisis.
I have three reasons for my change of heart.
First, politicians broke all promises of the Maastricht treaty. Not only was Greece let into the eurozone for political reasons, also the fundamental rule, “no member to exceed its yearly budget deficit by the equivalent of 3 per cent of gross domestic product”, was broken more than a hundred times. Mandatory punitive charges were never applied. To top it all: the “no bail-out” clause was wiped out in the wake of the first Greek rescue package.
Second, the “one-size-fits-all” euro has turned out to be a “one-size-fits-none” currency. With access to interest rates at much lower German levels, Greek politicians were able to pile up huge debts. The Bank of Spain watched the build-up of a real-estate bubble without being able to raise interest rates. Deprived of the ability to devalue, countries in the “south” lost their competitiveness.
Third, instead of uniting Europe, the euro increases friction. Students in Athens, the unemployed in Lisbon and protesters in Madrid not only complain about national austerity measures, they protest against Angela Merkel, the German chancellor. Moreover, the euro widens the rift between countries with the euro and those without. Of course Romania would love to join, but does anybody believe Britain or Sweden will find it attractive to join a “transfer union”? Meanwhile, dissatisfaction with the euro drags down the acceptance of the EU itself.
Instead of addressing the true causes, politicians prescribe painkillers. The euro patient suffers from three discrete diseases: as a result of the financial crisis, many banks are still unstable; the negative effects an overvalued euro has on the competitiveness of the “south”, including Belgium and France; the huge level of debt of some eurozone countries. It would be misleading to proclaim there is an easy way out. But it is irresponsible to maintain there is no alternative. There is.
The end result of plan “A” – “defend the euro at all cost” – will be detrimental to all. Rescue deals have led the eurozone on the slippery path to the irresponsibility of a transfer union. If everybody is responsible for everybody’s debts, no one is. Competition between politicians in the eurozone will focus on who gets most at the expense of the others. The result is clear: more debts, higher inflation and a lower standard of living. The eurozone’s competitiveness is bound to fall behind other regions of the world.
As a plan “B” George Soros suggests that a Greek default “need not be disorderly”, or result in its departure from the eurozone. But a Greek default or departure from the eurozone implies risks too high to take. First in Athens, then Lisbon, Madrid and perhaps Rome, people would storm the banks as soon as word got out. A “haircut” would not improve Greece’s competitiveness either. Soon, the Greeks will have to go to the barber again. Anyway, we now talk also about Portugal, Spain, Italy and, I am afraid, soon France.
That is why we need a plan “C”: Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is. If planned and executed carefully, it could do the trick: a lower valued euro would improve the competitiveness of the remaining countries and stimulate their growth. In contrast, exports out of the “northern” countries would be affected but they would have lower inflation. Some non-euro countries would probably join this monetary union.
Depending on performance, a flexible membership between the two unions should be possible.
Implementing plan “C” requires that four underlying problems are addressed separately.
We must rescue banks, not countries. Stabilisation of banks on a national level should replace current European umbrellas. In many cases, this requires temporary bank nationalisation.
Second, Germany and its partners in a new currency must forgo a significant portion of their guarantees to help refinance Greece, Portugal and others. As much of this money is already lost, this is an acceptable price for an “exit ticket”.
Third, there must be a new European central bank based on the Bundesbank, preferably not led by a German. The new currency should not be called the “D-Mark”.
Fourth, mechanics for entry would be similar to those for getting into the euro. If it was possible to form one currency out of 17, it should also be possible to form two out of one.
This plan will not be easy, but we need to focus on saving Europe, not the euro. This requires the conviction and foremost courage of Ms Merkel. Paradoxically, help could come from the south, where voters are getting tired of her lectures on what to do. For north and south, an end with difficulties is better than difficulties without an end.
The writer is former head of the Federation of German Industries (BDI) and has joined about 50 other business leaders in a legal challenge at Germany’s Constitutional Court against the Greece rescue package