Leading article: Euro's day of reckoning looms

The Franco-German elite which rules the euro is still in denial about the failure of its core project

Saturday 12 May 2012 22:59 BST

British pro-Europeans have been subdued lately. The antis who warned against the creation of the euro have been in full "told you so" flow since the credit bubble burst nearly four years ago. They are entitled to be, but we cannot allow them to claim the euro's failure as a vindication of their entire world view.

This newspaper wanted Britain to adopt the euro, but we said in 2003, when the Blair government decided against it, that The Independent on Sunday "accepts the economic conditions are not some marginal irrelevance". It was never close to being in our economic interest to join the eurozone.

However, we pro-Europeans did not take seriously enough the flaws in the currency's construction. We could see that not just the Greeks, but the Italians and the Spanish, had been let in to the club for political rather than economic reasons. But we assumed that the deep determination of the Germans to make the French project work, financed by the deep pockets of the German taxpayer, would prevail.

It has been clear to us for at least a year now that this is not so. Unfortunately, the Franco-German elite which rules the euro is still in denial about the failure of its core project. Last week's elections in France and in Greece were important breaches in that barrier against reality. François Hollande was elected to the French presidency on a platform of opposition to "austerity", shorthand for the orthodox policies defended by the outgoing president, Nicolas Sarkozy, and Angela Merkel, the German Chancellor. It is not clear what Mr Hollande will do about it; specifically what he will do about the eurozone treaty. He disagrees with it, but it is to be put to the Irish people in a referendum at the end of this month, so it is too late to change it. Instead, he and Ms Merkel are likely to repackage some large numbers when they meet in Berlin this week, to allow Mr Hollande to announce a co-ordinated stimulus.

None of which will deal with the fundamental question. Most economists agree that cutting public spending in the European periphery economies is the wrong response.

Larry Summers, Bill Clinton's former treasury secretary, said the other day that "high deficits are much more a symptom than a cause of their problems". The real cause, he said, is "lack of growth" and cutting spending makes that worse.

But even if the eurozone could pursue an expansionary policy, it would not solve the underlying problem. Germany could in theory run high inflation, but would never agree to do so, in return for some easing of the squeeze in Greece and Spain. Yet the fundamental imbalances would remain, until the parts of the eurozone return to their own currencies and allow their value to adjust.

Fortunately, the Greek election promises a way out of this impasse. The Greek people have rejected the price demanded for euro membership. It may be that a coalition government can be put together today, or perhaps there will be new elections. Either way, it's time to prepare for Greece's exit from the eurozone.

This may be (even more) painful for the Greek people in the short term, but at least it offers a way out, which trying to maintain the status quo does not. Equally, it may be that Greece can postpone the reckoning again by renegotiating the terms of its bailout. After all, the Germans can afford to buy the entire country, not just its sun loungers. But they cannot afford Spain and Italy, the next in line. It is time to start preparing for their exit from the euro, too.

The Greek people have spoken. It is in our interests that the euro countries resolve the currency's difficulties. Our prosperity depends on it. True pro-Europeans should support the break-up of the euro, as it is in the interests of the whole Continent.

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