His logic is nearly the same as I have stated many times: There’s simply too much debt in the system coupled with no political will by Germany to get involved in a transfer union.
Mervyn King, the former governor of the Bank of England, predicts the collapse of the eurozone in a book published this week, going further than his well-known private scepticism for the European single currency.
In extracts from The end of alchemy: banking, the global economy and the future of money, he says the burden of debts between nations in the eurozone “may become too great to remain consistent with political stability”.
Highlighting the need for the eurozone to integrate more fully, including significant debt write-offs, he says the process will probably exceed the willingness of the European people to bailout other countries.
“Monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous,” the former governor says.
Lord King has expressed similar views before and frequently railed against the requirement only for debtor nations to adjust policies while in office. In 2013 he told the FT that the requirements on Greece and other eurozone periphery countries were best described as hell. “It’s real hell. Instead of mere hell, it’s real hell,” he said.
The book primarily concerns the future of banking and imbalances in the global economy. He says the world will inevitably face financial crises because it has not sufficiently resolved the issues that caused the problems of 2007-08.
Lord King is by no means sanguine about breaking up the eurozone. Predicting that southern European countries will tire of the efforts needed to stay in, he adds that “the counterargument — that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union — has real weight”.
“But if the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then leaving the euro area may be the only way to plot a route back to economic growth and full employment. The long-term benefits outweigh the short-term costs,” he writes.
Here’s a question I have posed and answered before “Is the euro so fundamentally flawed, and tensions so high that the euro cannot possibly be saved at all?”
The short answer is yes.
The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.
Eurozone Breakup Inevitable, But How?The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.
It would be best for all involved if Germany left the Eurozone and went back to the Deutschmark. Germany would have an immediately credible currency. Should Greece or Spain leave first, those countries might experience hyperinflation or massive inflation.
It’s important to remember that Germany suffers regardless. As long as the Eurozone stays intact (it can’t and won’t over the long haul) German taxpayers have to keep acting bailing out foreign countries, foreign banks, and their own banks.
On the other hand, were Germany to leave, the debts to German banks will not be paid back in Deutschmarks but rather deflated Euros.
On the whole, Germany exiting the Eurozone would be less disruptive, than massive inflation scenarios in Greece, Portugal, and Spain.
Three Alternative Paths
- Enough debt writeoffs to allow Europe to grow
- High unemployment and slow growth in Speece, with stagnation elsewhere in Europe
- Breakup of the eurozone
There are no other realistic choices.
Note: “Speece” is my coined word meaning Spain, Portugal, Greece, peripheral Europe in general.
In his book, King stated “The attempt to find a middle course is not working. One day, German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit.”
Bingo. I said the same thing many years ago. And as noted above, Germany will pay a price one way or another. Unfortunately, the sad state of politics is that a destructive breakup is the most likely outcome.
Mike “Mish” Shedlock