Thursday, October 18, 2012

Wolfgang Münchau on "the Spanish Bomb" and Schäuble's EU reform proposals

Wolfgang Münchau talks about what he sees - or at least the headline writer did - as the "two ways out of the euro crisis" Zwei Wege aus der Euro-Krise Spiegel Online 17.10.2012. He sees German Finance Minister Wolfgang Schäuble's new proposals for EU reform as a blueprint for "a political coup." Münchau sees his current proposal as a revival of a concept of "core Europe" that he advocated 20 years ago. The idea being that the European Union should have two distinct parts, a core of wealthier countries with a higher degree of political and economic integration and a second group that was part of a looser union with the core group.

One of two options Münchau sees for saving the euro is either splitting it between a euro for the richer northern countries and a separate one for the southern ones. Or, as a variation on this, for Germany to pull out of the eurozone, which is what George Soros has seriously suggested. The second option "wäre eine politische Union, in der Fiskalpolitik und Bankenpolitik im Zentrum angesiedelt sind. Schäubles Vorschlag adressiert nur einen winzigen Teil einer solchen Union." ("would be a political union in which fiscal policy and bank policy are positioned in the center [central government]. Schäuble's proposal addresses only a tiny part of such a union.")

As he notes, Schäuble is focused on overspending as the source of the euro's problem and therefore austerity as a solution. Only in Greece, Münchau reminds us, was excessive public debts stemming from deficits a real problem before the crisis. Spain and Ireland were praised by fiscal conservatives as model examples.

And Münchau reminds us that the current German government of Chancellor Angela Merkel in which Schäuble serves is actually an obstacle to greater union. And the current Merkel/Schäuble course of giving Greece just enough aid to keep paying their current level of debt service will not solve their problem. And, "Ohne eine Akzeptanz von Transfers und Schuldennachlass lässt sich die Peripherie nicht im Euro-Raum halten." ("Without an acceptance of transfers and debt reduction it will not be possible to keep the periphery in the euro area.")

In a previous recent column, "The Spanish Bomb," (Die spanische Bombe Spiegel Online 10.10.2012) Münchau writes about the vulnerability of Spain, which was hit hard by the bursting of the real estate bubble there and the sudden end of the large influxes of capital from wealthier countries, not least from Germany. Not only are they struggling with high public debt ratios now but their private debt levels are at 235% of national income. This leaves them with consumers facing heavy deleveraging that impairs their ability to boost the economy through consumption, undercapitalized banks that have to restrict lending, a pro-cyclical austerity policy that is worsening the shrinking of the economy, a staggering level of unemployment, and, to top it off, a serious and popular secessionist movement in the wealthy province of Catalonia.

Münchau sees only two ways out of that for Spain and also for Portugal. Either Germany and the other wealthy EU countries directly relieve the private sector debt, or they leave the eurozone.

One of those outcomes is clearly more likely than the other.

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