This week the Deep End has mostly been about the Eurozone – and, in particular, George Soros’s must-read essay on the subject in the New York Review of Books.
While die-hard Europhiles celebrate recent developments as a turning point in the Eurozone crisis, Soros demonstrates that unlimited bond purchases on the part of European Central Bank won’t deal with underlying causes of the crisis – indeed, they’ll only condemn the Eurozone debtor countries to further economic decline.
But there’s an alternative. Actually, two alternatives – “Germany,” Soros says, “must lead or leave”.
By “lead”, he means that Germany must embrace a role in Europe analogous to that played by America in the immediate post-war period:
- “The United States emerged as the leader of the free world after the end of World War II. The Bretton Woods system made it the first among equals, but the United States was a benevolent hegemon that earned the lasting gratitude of Europe by engaging in the Marshall Plan.”
A cynic might venture that, in fact, Europe never forgave America for the Marshall Plan. In any case, it is hard to see German voters agreeing to anything on a remotely comparable scale.
Thus if Germany won’t lead, then it must leave (the Eurozone, that is):
- “…if Germany were to exit and leave the common currency in the hands of the debtor countries, the euro would fall [in exchange rate terms] and the accumulated debt would depreciate in line with the currency. Practically all the currently intractable problems would dissolve. The debtor countries would regain competitiveness; their debt would diminish in real terms and, with the ECB in their control, the threat of default would evaporate.”
Soros readily admits that Germany’s exit would represent a shock to the system, but, he claims, a containable one:
- “A German exit would be a disruptive but manageable onetime event, instead of the chaotic and protracted domino effect of one debtor country after another being forced out of the euro by speculation and capital flight. There would be no valid lawsuits from aggrieved bond holders.”
And if that’s not enough to convince the doubters, then here's the killer fact:
- “It may come as a surprise, but the eurozone, even without Germany, would score better on standard indicators of fiscal solvency than Britain, Japan, or the US.”
So, that’s the solution, then: Taxi for Merkel, problem sorted. Except that a rather important point has been overlooked. The only reason why the Eurozone still looks good even without Germany is because of the smaller solvent nations like the Netherlands, Finland and Austria; and why would any of these countries want to stay in a club dominated by France, Italy and Spain? Without their big Teutonic brother to stand-up for them, they’d risk losing a lot more than their dinner money. Make no mistake: if Germany leaves, so does the rest of solvent Europe.
But if Germany can neither lead nor leave, is there any other long-term solution? Well, there is one thing that could be done. The leaders of the Eurozone could always admit that it’s all been a big mistake and put plans in place for an orderly dissolution of the entire misbegotten enterprise.
How about that?