The nuclear option for three Euro Zone countries?
The Germans seem to have decided to bite the bullet and cast the weakest members of the Euro Zone adrift but as we have all been there before with grand economic meetings, the words may not match the deeds.
The “breakthrough” at the meeting of finance ministers was that Germany and France admitted they could see there was a problem with the Euro. Better late than never perhaps!!!!!
It appears that G20 countries and banks have been planning for Greece to default on its massive debts some time soon. What is a lot less clear is what each G20 country has planned to do in secret and how much the actions are self serving and how much they are co-operative with other G20 nations. We should know within six weeks but that may be too late.
There are claims circulating that Germany has decided to firewall the rest of the Euro Zone from Greece, Portugal and Ireland so that when Greece defaults the other two countries could be dumped as necessary. The weakness of the plan is that these are not the only Euro Zone members with massive unsustainable debts and under capitalized banks. There is no guarantee that the markets will stop at bankrupting the three weak countries and some will argue that Ireland has already begun taking the steps required to bring its debts under control.
Italy and Spain are in the same risk area as the three sacrificial countries, but if they eventually defaulted on their debts, the shock wave would destroy most of the Euro Zone countries and seriously damage countries around the world. The resulting chaos could take a decade or more to sort out, with economic growth sluggish throughout the global economy. At that point serious problems would hit the newly emerging major economies because they have grown by massive exporting to the rest of the world and have kept their poorer citizens under control by promising that wealth would cascade down.
France is at serious and largely unreported risk on three fronts. Firstly, their banks are heavily exposed to Greek debt and in urgent need of recapitalization. That recapitalization will cause major domestic pressure on a nation that has a long history of violent responses by its citizens to unpopular government measures. Secondly, Britain and a number of other EU countries are likely to demand an ending or major restructuring of the Common Agricultural Policy, that has unfairly benefited French farmers and the Mediterranean countries of the EU, in return for agreeing to the EU proceeding as two groups, one led by Germany and the other probably led by Britain and comprising EFTA nations. It is by no means certain how many present Euro Zone countries will wish to remain in the Euro and Germany could end up leading a very small rump. That may not be all bad news for the German people economically and a majority do indicate in opinion polls that they desire a return to the DMark.
The wild card, and one reason why the Euro Zone has tried so desperately to ignore the emergency, is that the Euro Zone countries are only able to meet debt reduction requirements if the three weakest members are cast adrift and the richest members pick up the cost of recapitalizing Euro Zone banks and paying off current debts. The Euro Zone is only just able theoretically able to meet its collective obligations and this is what is panicking markets and other governments outside the Euro Zone. With Merkel’s party losing ground to other political groups, Germany may shortly adopt a very different set of policies to those currently being predicted.
When Britain’s Chancellor Osborne was stating in the last few days that the world had 6 weeks to save the global economy, he seemed pessimistic against claims by other politicians but history may show him to be a wild optimist. He may be banking on the economic markets having lost their desire to sell down and be clutching any straws that politicians may throw down. If the first half of this week shows markets continuing their slide or showing a very weak recovery, the omens will not be good and the coming months may see a Great Depression many times greater than in the 1930s. If that happens, those responsible will be the pygmies of the EU Federalist and Euro Zone camp who have fiddled while the Euro burns.