J Brauer | © Stone Garden Economics
As The Economist predicted, several times over, we are faced with the now acute possibility of a eurozone collapse. Government changes have taken place, or are taking place, all around the periphery, but also in otherwise stable Holland, and now in France as well. All are geared toward less “austerity” in the government budgets. But with tax receipts collapsing, the need for debt financing rises, even as outsiders are ever more reluctant to shovel further loans into weak states. What cannot go on, must stop. Germany, the biggest force that could stop the euro from unraveling, seems dead set not to do so unless the conditions it demands are met.
This brings up two scenarios, the first quite serious, the second as yet improbable but deliciously ironic. First, seventy percent of polled Greeks are said to want to keep the euro. And keep it, they do. Reportedly, deposit withdrawals are high and rising. Evidently, and sensibly, Greeks want to hold euros in cash rather than in vulnerable banks. If Greece does exit the eurozone and converts to a new national currency, it is expected to devalue rapidly. Holding euros in cash will then come in quite handy. In effect, Greeks are already voting to stay in. They should give the same message to whomever they soon vote into office.
If Greece does exit, the risk rises appreciably that Portugal, Ireland, Italy, and Spain all might crumble and exit the euro as well; even France will be in trouble if its new president were to follow through on his election promises. And so a second—almost hilariously ironic—scenario arises, and that is that Germany might then be about the only heavyweight country left in the eurozone: The mark still rules.
The prospects are dreadful and no fun to contemplate. Already costs are high as businesses implement plans to deal with a potential, highly disruptive euro crash. Foreign direct investment in Greece has practically stopped, hollowing out its economy even more. But Germany is right: Eurozone-wide, inviolable, and fully enforceable budget rules must be agreed. It was always strange to have a unified monetary policy regime while fiscal policy varied all over the eurozone. With an agreement in hand, Dr. Germany can relent and pursue a long-term adjustment plan that includes a little less short-term pain for its many patients. Both parties have something to negotiate for. Therein still lies hope.
J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.
