A few years ago it wasn’t really the thing in mainstream media circles to mention the inherent instability of the euro. And it most certainly wasn’t the thing to mention that its inherent instability might lead, in the end, to its collapse.
But by the beginning of last year, as the spreads between the sovereign debt of the likes of Greece and Spain and that of Germany widened, that changed. Greece was occasionally mentioned as a potential problem for ongoing unity – although always with the aside that any country leaving the zone was, as John Authers of the FT put it in January 2009, “close to an unthinkable event.” It isn’t unthinkable any more: for the last few weeks the business pages and blogs have been full of almost nothing else.
But however much the market might have liked the drama, it looks like Greece isn’t going to be the one to break ranks this year. And why would it? Imagine if it chucked in its membership and issued its own new currency. You might think that a good thing. Not having a depreciating currency has long been seen to be a big part of Greece’s problem. But the nasty truth is that it wouldn’t really help much.
Why? Because Greece’s debt would stay denominated in euros (shifting it into the new currency would be an effective default). So the more the drachma II fell, the bigger the debt burden would become. Currency-risk-averse investors would also demand an ever-greater premium to buy any new debt. It would be miserable.
Issuing a new currency would also cause an immediate run on all the banks (who would want it?) and make no difference whatsoever to the core problems of the untaxed black economy and rigidity of the public sector.
But imagine if it wasn’t Greece that left the euro, but Germany. The deutschemark II wouldn’t fall. It would rise, making any euro debt easier to dispose of and making any euro-priced assets the Germans happen to fancy even cheaper to buy than they already are. It might also make Germany’s patient tax payers (who have muddled along with no big wage rises and no feel-good house price bubble of their own for years now) happier than the alternative – a great deal of money spent bailing out the eurozone’s more free-spending members.
In the 1990s, says Ambrose Evans Pritchard in the Telegraph, German citizens were given a pledge by their leaders that the loss of the D-mark would not “lead to monetary disorder or leave them liable for Club Med debt.” Given that Greece has a public debt now heading for 140% of GDP by 2012, it looks as though that pledge will be very hard to stick to.
Indeed, along with the rest of the eurozone, Germany has just promised to provide “determined and co-ordinated action if needed to safeguard stability” in Greece. It’s enough to make you wonder if this time next year a new German currency will have moved from being completely unmentionable to merely being “an almost unthinkable event.”