David Prosser: When will Germany call time on its economic experiment?

Thursday 25 November 2010 01:00
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Outlook So why have serious-minded people across the European Union begun talking once again about the break-up of the euro? Not, as you might imagine, because Ireland is on the verge of quitting the single currency – just as none of the other nations flirting with sovereign debt default would really think about walking out.

In Ireland, as there continues to be in Greece, there will be real anger about the sacrifices people are being asked to make in order to get a European Union bailout: might they not be better seeing their nations default on their debts and walk away from such strictures? And there is no shortage of analysts pointing out that Ireland's property boom was fuelled in the first place by the low interest rates imposed upon it by its membership of the monetary union.

Still, while there are superficial advantages to quitting the euro for countries such as Ireland – the option of devaluing their way out of debt, for example – they do not outweigh the benefits the weaker economies have enjoyed fromsheltering behind stronger nations within the single currency. This is one reason why the euro has often been most popular in such nations. Public opinion in Spain, for example, has always been much more pro-euro than in Germany.

Moreover, in any of these countries, one almost immediate effect of dropping out of the euro would be a big rise in interest rates. Mortgage borrowers, with their variable rate, euro-denominated loans, would feel even greater pain than they face from austerity packages.

No, the threat to the euro comes not from the weakest members, but from its strongest. Though the single currency is more the project of Germany than anyone, the patience of its voters is dwindling.

Remember what triggered the current phase of the eurozonecrisis: a speech to the GermanParliament by Angela Merkel in which the Chancellor promised to reform the rules on financial stability so as to ensure, for the first time, that investors took a share of the pain in any bailout.

Ms Merkel's speech could hardly have been worse timed and condemned Ireland to the fate it is now suffering. But her frustration is understandable: Germany cannot simply go on picking up the bill for bailing out profligate fellow euro members. That is not politically acceptable – or even possible, if it comes to a rescue of Spain.

Reform of the treaties governing the euro is thus essential for Germany – and a much more radical overhaul than what Ms Merkel proposed three weeks ago. Think powers to kick countries out of the euro should they breach its fiscal rules, for example.

In practice, however, it is hard to imagine Germany succeeding in getting the reforms its electorate now desires. And that is the biggest threat to the European single currency right now – that next year, in frustration with its inability to deliver meaningful reform of the euro, Germany (and a handful of like-minded countries) might walk away from the project in which it has invested so much.

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