Will the Euro Survive? Well It Will Today, Tomorrow, Not So Sure

And The Biggest Loser Will Be ? ? ?  Germany!

The writings have started.  These are writings about whether or not the Eurozone, those countries that have adopted the Euro will continue with a single currency or whether or not the Euro will cease to be in its current form.  The lesson learned from all of this, bad policy results in bad outcomes.

Martin Wolf, writing in the Financial Times says this. 

If policymakers had understood two decades ago what they know now, they would never have launched the single currency. Only fear of the consequences of a break-up is now keeping it together. The question is whether that will be enough. I suspect the answer is, no.

Now Mr. Wolf has generally written pessimistic things about Europe, which means that he has generally been correct.  And no, neither he or anyone else is thinking about an abandonment of the Euro at this moment in time.

However, when the announcement was made that Silvio Berlusconi, Italy’s Prime Minister would resign after the new economic program was passed, markets did not react with the euro-phoria  (yes, The Dismal Political Economist made up that word) they have in the past when the crisis was seen to recede. 

Italy could soon need an international bailout just as the financially strapped nations of Greece, Ireland and Portugal did before it.

The difference this time is that Italy, the third largest economy in the euro zone, is on a different scale than those other, much smaller European nations. That means any bailout would have to be proportionately far larger, and some analysts question whether the European Union or the International Monetary Fund have enough resources to pay for it at all.

Memo to “some analysts”, the answer to your question of whether or not Italy could be bailed out by the EU or IMF is no, the resources are not there.

The immediate problem is that Italy’s interest rates on its government debt has risen dramatically.  They are now over 7%.  Italy is not Greece, and the crisis has some ways to go before it becomes a full blown storm.

Italy could withstand interest rates at this level longer than weaker countries like Greece, analysts say, and there are a number of things that may yet happen to ease the crisis — for example, if Italy elected a new government credibly committed to fixing its debt woes and restarting growth. 

But expecting effective government in Italy is like waiting for Godot.  It is supposed to come but it never does.

Meanwhile Mr. Wolf is saying

either the entire eurozone adjusts, or it breaks up. Germany should accept the risks of the former path. I know that its nightmare is the hyperinflation of 1923. Yet the brutal austerity of 1930-32 finally brought Adolf Hitler to power.

which is not going to comfort anyone.  But adjustment for the Eurozone may not be possible, the program of severe austerity leads to low or negative growth, higher deficits, fundamental political unrest and larger not smaller debts.

The scary part of all of this is that Germany, the sole strong economic power of Europe is at risk, and if Germany is at risk western economies are at risk.  German is an economy dominated by exports.  At the current time, the Euro is weakened because of the rest of Europe.  Remove the countries that are weakening the Euro from the Euro and the Euro soars.  Then Germany’s exports are no longer competitive and the German economy tanks. 

Anybody want to live in that world?  Anybody?