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CommentInsight & Opinion

A German exit from the euro is no way to end blame game over debt crisis

Andrew Sheng says holding the zone together will be hard, but a break-up would be disastrous

PUBLISHED : Saturday, 29 September, 2012, 12:00am
UPDATED : Saturday, 29 September, 2012, 2:36am

As we enter the fourth quarter of 2012, two influential commentators have questioned whether Germany should exit the euro zone. George Soros argued that Germany must either lead or leave, while Financial Times columnist Martin Wolf considered the question and argued that Germany will have to pay a high price for its mercantilist policies.

The fact that German Chancellor Angela Merkel has openly overruled the Bundesbank president on commitments to the euro suggests there is now political commitment to hold the euro zone together. After the German constitutional court agreed to Germany bailing out the other countries, the markets seemed to rally, but interest rates on Spanish debt seem to have risen back to the sensitive 6 per cent threshold. Financial markets do not seem to have too much confidence in the politicians.

Political will aside, even if the euro zone holds together, the road to recovery will be long and hard. After a lot of acrimony, there seems to be some consensus that any strategy will require that at least four major conditions are resolved.

The first is clearly the restoration of confidence in the euro, essentially requiring all 17 governments to demonstrate their political and financial commitment by deeds rather than words. This means politicians must be willing to take the political pain and make available the financial firepower to get through the dark times.

The second is to address the structural divide between the surplus and deficit countries, with Germany, the Netherlands and northern Europe on one side and southern Europe on the other. This requires a unitary fiscal system and a unified banking system, instead of trying to loosely co-ordinate 17 disparate national systems.

The third is to address the immediate issue of high interest rates causing both solvency and liquidity problems in the deficit countries. Money is flowing away from deficit countries (causing a liquidity squeeze and high interest rates to reflect credit risk) to surplus countries or even outside Europe. The European Central Bank is recycling the liquidity but, ultimately, it is the surplus countries that will have to bear the credit risks of default. Just like the US Federal Reserve, "quantitative easing" is only a temporary painkiller that buys time for politicians to address the structural issues.

The fourth is to get enough growth back into the euro zone to slowly work down the debt overhang. There are political limits to austerity if the unemployment rate is above 25 per cent, particularly for youths.

The euro-sceptics think a break-up is easier. I find the logic of asking the engine room of a supertanker to exit the ship just because the front part is under water a bit curious. The sinking of the euro supertanker would be a disaster not only for Europe but the whole world.

I have been reluctant to comment on Europe in case I am seen as an Eastern gloater. The European problem has some parallels in Asia - aren't many national banks stuffed full of long-term sovereign debt, too? Asia was saved from this round of crisis because it suffered the Asian financial crisis 15 years ago and learned its lesson: don't overspend and don't overborrow. Nobody, not even the International Monetary Fund, will relieve you of your pain when you do.

A Japanese friend said Europe finally killed the idea that a unified Asian currency zone would be a good thing. Indeed, it is clear we can have no single global currency as long as we have nation states with no global governance architecture.

The European crisis proves once again that ideas that are part of the problem cannot be part of the solution. The founding fathers assumed that the unity of democratic states through a single currency would lead to political unity, forgetting that as long as national sovereignty is not ceded to a central authority, loss allocation within the union cannot be distributed easily. Losses are currently being distributed through crisis.

The central political question in Europe is whether asking Germany to bear the losses means it will be given political leadership on fiscal and financial issues. Germany fought two world wars because the answer to both questions was "no".

This is why I find the argument about Germany being mercantilist neither convincing nor helpful. Most people forget that Germany was the economic laggard in Europe in the 1990s as it struggled to reintegrate east and west Germany. It then rebuilt its economy because its corporations worked with the unions to get back its productivity, while the deficit countries more or less relaxed.

We live in a multi-speed world where there will always be imbalances, some demographic, some technological, some unintentional. The self-order of markets and disorder of statehood means we have yet to find a global solution to allocate losses from national imbalances. We do not have the mechanism to foster shared interests to deal with shared pain.

Crises have phases. In the early phase, there is denial that the problem is serious. In the middle phase, there is recognition, but no one is willing to take the pain of creative destruction. Blaming each other will not ease the pain of structural adjustment. Postponing the pain through printing money is a double-edged sword. You buy some time, but politicians may be lulled into thinking that this is a solution, rather than a salve.

It will not benefit Germany or the world for it to exit the euro.

Andrew Sheng is president of the Fung Global Institute

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