The United States of Europe or the Collapse of the Eurozone?

14.2.2012 | My articles | Author: Jan Mládek

The Polish Foreign Minister Mr. Radoslaw Sikorski recently issued a dramatic appeal to Germany to do something to save the Eurozone. He had good reasons for being so dramatic. In fact, the Eurozone is at a crossroads.

The Polish Foreign Minister Mr. Radoslaw Sikorski recently issued a dramatic appeal to Germany to do something to save the Eurozone. He had good reasons for being so dramatic. In fact, the Eurozone is at a crossroads. Either the Eurozone will be able to quickly create the United States of Europe (USE) or it will disintegrate. In this situation, the Polish foreign minister is more afraid of Germany's unwillingness to act, than of German tanks. And this is not an exaggeration.

Germany is expected to take a leading role in this crisis due the fact (amongst others) that the country never stopped manufacturing and exporting, nor did it succumb to the temptation of changing from a real economy to one based on the financial sector, the speculations of which have caused serious damage to Anglo-Saxon countries, and by extension to the rest of the world. Germany is in fact the strongest economy of Europe. Germany is the manufacturer of Europe, and one of the great manufacturers of the world. And it is necessary to add that in the Czech Republic we are on the same boat as Germany. We are a manufacturing country, we are not making money from speculations on global markets (as London does). Hence, we should not follow The United Kingdom in its effort to disintegrate the EU, but rather support Germany and Poland in keeping it together. It is vital to national interests!

Irresponsible and profit-hungry investors, who loaned money to illiquid countries at high rates of interest, want Germany to assume responsibility for debts that it did not create. That is, they want Germany to guarantee European Stability Bonds that are intended to save the Eurozone, but at the expense of Germany. That is, Germany is to assure irresponsible investors that their debts will be assumed by someone who is more solvent. If Germany does this, it will further increase the level of moral risk-taking that had already brought the world financial system to the brink of collapse in September of 2008. Germany would like to avoid the fate of Ireland. In 2007, Ireland was a prosperous country with public debt under 25%. However, after this year the Irish elite have made quite a few
fatal mistakes. They have started to protect the domestic banking sector. First of all, they have increased savings insurance to 100% for savings under 50,000 EUROS. This has quickly become widespread throughout the whole EU, and may be a problem in the future. However, the Irish government went even further. They have decided to provide guarantees to the whole banking sector, to the
whole balance sheet of Irish banks. Unfortunately this guarantee has been consumed, and in one year Ireland reached a deficit of public finances of 32% of GDP in 2010. To sum up, the Irish story is very simple. The country moved from public debt of 25% in 2007 to 108% by the end of 2011. It is not surprising that Germany is not willing to play Ireland on the EU level. Humbly speaking, in should
be in Czech national interests that Germany does not make too many mistakes. Otherwise we will have no country to export our products to...

Another alternative solution is the large-scale printing of money, as done by the ECB, thus once again absolving irresponsible and profit-hungry speculators of their responsibility. These speculators will then tell their clients: you see, we did the right thing; look at the inflation. We couldn't have anticipated the devaluation of your contributions... People in the EU and its vicinity, who have been saving for their whole lives, will pay for this with part of their savings. This is too easy of a shift in paradigm. The paradigm, up until recently, was that central banks should be very cautious in printing money, because after the removal of the gold standard in 1971, the prudent monetary policy of the central bank became the only way to maintain the stability and credibility of the financial sector. Now the same people who were promoting this paradigm are promoting the printing of money. It means that they were completely wrong at least
once: either then or now...

But Germany, too, must shoulder some of the blame. The failure by France and Germany to ad here to the pact for stability and growth undermined fiscal discipline across Europe. Germany also made money from loaning to illiquid and insolvent countries, not to mention the fact that the Eurozone gave German companies a large market and large trade surpluses - estimated at up to 100 billion Euro per year. If they would have kept the D-Mark, they would not have been able to produce such huge surpluses.

Germany should therefore be the bearer of an economic model different to the one that failed so seriously in 2008 - a model built on a real economy the production of actual goods and services, and which suppresses speculation and punishes moral risk-taking. In other words, Germany should come as soon as possible with some kind of updated mode of Rhein capitalism; otherwise we are facing the real risk that we will have no capitalism at all.
 

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