August 8, 2013 4:53 pm
Imagine a corner shop that is not doing well. At best it cannot provide its owner with a minimum standard of living. At worst it cannot even cover its costs and is kept going by loans and donations from relations, friends and well-wishers. One of these was even heard to remark that he would do what was necessary to keep the shop going, and added: “Believe me, it will be enough”.
Herbert Stein, an economist active in Washington towards the end of the last century, said that if a policy or situation was unsustainable, it would not be sustained. But he did not indicate how long it would take for such situations to unravel.
Meanwhile, it is in the interests of the eurocrats to make the problems seem as complicated as possible so that only a small number of so-called financial experts can even discuss them; and we have had one financial package after another and one guarantee after another to keep the structure going. But loans and guarantees do not make the unsustainable sustainable. There is only a limited number of ways that the situation could develop.
The third option is unlikely, but included for completeness. Germany and other northern euro members could pursue more “expansionary” (read inflationary) policies, thus reducing the agony of the south. Alternatively it could continue to subsidise the peripherals indefinitely.
The fourth option is for one or more of the peripherals to leave the eurozone. All hell would then break loose, not only among the departing but also in the remaining euro countries, where banks have large and potentially depreciating euro assets on their books. But eventually the ex-euro members would pick up the pieces and emerge with more tolerable performance, as occurred with Argentina when it severed a supposedly unbreakable link with the US dollar. Some economists would like to approach matters the other way round and would prefer Germany and its neighbours to take the initiative and appreciate out of the euro; but this will not happen irrespective of the results of he forthcoming German elections.
Of course, one can imagine any number of permutations and compromises among the above four conjectures, but the possibilities are limited. If I had to bet (which I don’t), my money would be on number 4. But I would not bet at all on when it will occur. The Holy Roman Empire – which was proverbially neither holy nor Roman nor an empire – was founded by Charlemagne in 800 and lasted until it was dissolved by Napoleon in 1806. The German Confederation was inaugurated after the Napoleonic wars and had no real powers over member states. It was reinforced by a customs union (Zollverein) in 1834 and the whole rickety structure lasted until it was dissolved into the German Reich by Bismarck in 1871.
History may have since sped up, but we do not know by how much, and the timescale of euro disintegration is anyone’s guess. There is a limit to how much forward guidance one can give.