Wednesday, January 26, 2011

Germany and the Future of the European Union

From today's Open Europe news summary:

Germans’ trust in the EU hits all-time low FAZ reports on a poll conducted by
the Allensbach Institute, showing that German citizens’ trust in the EU has
fallen to an all-time low. 63% of respondents had "little or no trust" in the
EU, up from 51% in March 2010. Only 25% had “very large or large trust" in
European integration, down from 37% ten months ago. 68% of respondents had
“little or no trust” in the single currency, almost back to the level of 16
years ago. Only 4% could correctly answer the question “Who is Herman Van
Rompuy?”FAZ Allensbach InstituteIMF: Eurozone crisis is the biggest threat to global
economy;Bloomberg poll: 59% think one or more members of the eurozone will leave
the currency by 2016An IMF report released yesterday warns that a deepening of
the economic crisis in the eurozone is the biggest threat to the global economy.
A poll conducted by Bloomberg, of 1,000 investors, analysts and traders, reveals
that 59% think one or more members of the eurozone will leave the currency by
2016, 11% think this will happen within 12 months.The WSJ reports that
yesterday’s debut bond auction to fund the EFSF was nine times oversubscribed;
bids were received for over €40bn at yields of 2.89%. El Pais reports that the
Spanish government’s decision to inject only €20bn into the cajas yesterday has
been received critically by investors. Rating agency Moody's has estimated that
the cajas lacks €89bn in capital, reports FAZ.The Irish Times reports that,
ahead of today’s vote in the Irish Parliament, three independent MPs, crucial to
the government’s majority, have threatened to withdraw their support for the
Finance Bill unless changes are made. A separate article in the paper reports
that Germany may concede on lower-interest loans to Ireland and other peripheral
eurozone countries if they agree to establish a cap on budget deficit in their
constitutions.Les Echos reports that yesterday EU Economic and Monetary Affairs
Commissioner Olli Rehn travelled to Berlin to discuss the possibility of
increasing the size and scope of the EFSF with some high-profile members of the
FDP, the junior partner of German Chancellor Angela Merkel’s coalition
government. However, FAZ notes that Rehn failed to persuade German Foreign
Minister and FDP leader Guido Westerwelle. Meanwhile, writing in
Wirtschaftswoche, Director of the IFO Institute Hans-Werner Sinn argues that
calls for an increase of the EFSF are dangerous, adding that they hide the EU’s
desire to take over a part of the old debt of troubled member states.City AM City AM Bottom Line City AM EurActiv City AM WSJ WSJ 2 WSJ 3 WSJ 4 WSJ 5 Irish Times Les Echos Le Monde Irish Times Público City AM FT: Spiegel Le Monde: Ricard BBC: Hewitt Irish Independent: McWilliams El Pais El Pais 2 Irish Times Bloomberg Jornal de Negocios Económico Expansion FT
Germany holds the key to any future that the EU may have, and it appears that the great mass of the German people do not have confidence in the EU. The German elite continue to support the EU; for example, the Irish Times reports that "Germany may concede on lower-interest loans to Ireland and other peripheral eurozone countries if they agree to establish a cap on budget deficit in their constitutions." So, these countries will get their lower interest loans and agree to something that they have no intention of doing; i.e., capping their deficits. This is just kicking the can further down the road (an old American expression). But private German citizens, like Hans-Werner Sinn recognize the danger of socializing EU member states' debts.

Perhaps the largest lost opportunity following the collapse of the Soviet Union was Germany's concession to the rest of Europe that it abandon the Deutschmark in exchange for being allowed to unify their country. Despite the blustering of the other European nations, there was no way that German reunification could have been prevented. Had Germany proceeded with reunification and kept the Deutschmark, it is very likely that several nations of Europe would have converted the Deutschmark by now (the conclusion drawn by Professor Philipp Bagus in his recent book, The Tragedy of the Euro) and the financial crisis would not have spilled over to these countries. Furthermore, a deteriorating dollar exchange rate with a large Deutschmark denominated region would have had a sobering effect on the Fed, which may have led it to abandon its easy money policies.

But, the Germans got the Euro, which has been inflated almost as much as the dollar, instead of a much sounder Deutschmark. Although there is no going back to the 1990's, Germany still can shed itself of the Euro. Despite the temporary challenges from such a move, in the long run a strong Deutschmark would be a beacon of sanity for the rest of the world.

1 comment:

  1. We can certainly use any "beacon of sanity" that might present itself, given where our own (U.S.) economy is headed.