Will German democracy kill the euro?

Commenting on the Irish bailout, Die Welt editor Dorothea Siems makes some very important points.

She argues:

The euro adventure stands the risk of meeting a terrible end. Germany must make clear where the borders of what it can bear lay. This is because the euro isn't a goal in itself. The EU is a lot more than just Euroland. Not because of national power play, but because of a sense for reality. The future of the EU should not be made dependent of the euro, simply for the reason of not wanting to harm European unity in the long-term.

She goes on to argue that a break-up of the eurozone "is possible".

Anyone who thinks that is nonsense should consider that EU's aid plan forces the Greeks to making savings [to its public finances] worth 15 percent. Such an austerity plan has never taken place in peacetime. Ireland's situation is hardly better.

An online opinion poll in the paper shows that 89 percent of readers want to a return to the D-Mark. Obviously to be taken with a pinch of salt but still an indication of something.

German democracy is more vibrant than what many people think - and selling bail-outs to the German electorates is hard work, to put it mildly, as Angela Merkel knows too well.

On Sunday 10 May 2010, her CDU party dropped by more than 10 points in regional elections in Germany's most populated state, North Rhine-Westphalia, following the announcement of a 110 billion euro bailout program for Greece. She could thank her lucky stars (and some political shrewdness) that the follow-up 500 billion euro aid package to support the euro didn't come a couple of days earlier (it was agreed on the evening of the elections).

Meanwhile, Handelsblatt today reports that various top German economists from most of the important German economic institutes have warned against making the Eurozone aid package permanent, saying it would lock in a permanent debt union, burdening German taxpayers which in turn would endanger the legitimacy of monetary union in Germany.

Therefore, as we've argued for some time, it could be Germany that calls time on an enlarged euro.

This line is today picked by Gideon Rachman in an article with the headline "Germany could come to kill the euro". He argues:

Countries such as Greece and Portugal might be a lot more competitive if they could devalue their currencies. But quitting the euro might feel like a national humiliation for members of the southern periphery. There is also no mechanism for quitting the euro in an orderly fashion. Any obvious preparations to do so might trigger a bank run. So if the euro is to break up, the country that sues for divorce is likely to be a strong economy – with Germany as the likeliest litigant.

The Germans would not take this step quickly or lightly. A commitment to European integration has been a leitmotif of German foreign policy for half a century.

But if the Germans became convinced that their eurozone partners were simply impossible to deal with – and that therefore the whole single currency experiment could not work – they might decide to quit. There are two ways I could imagine this happening.

The first is a successive wave of financial crises across the eurozone, affecting larger countries, which gradually sap German taxpayer confidence that the 'loans' that the EU is extending to its weaker members will ever be repaid. The second is if, as seems quite likely, the treaty changes that the German government is demanding to satisfy its courts fail to be ratified by some of the other 26 EU members. At that point, the Germans might throw up their hands and say, in effect, 'Well, we tried our best, but the other Europeans won’t do what is necessary to save themselves.' Germany might then feel released from its historic obligation to 'build Europe'."

All very interesting. In our most recent briefing we explain why we think that a split-up of the euro into two separate currency blocks looks increasingly likely.