The big Euro break up question – Should Germany in fact be the First to leave?

During the last 5 years, European nations have been trying to fight the huge government debts accumulated during the boom years of the noughties, in particular by the southern European economies.

Under the supervision of the ECB, the European Commission and the IMF, various measures have been implemented and all which have, at their heart, simply destroyed GDP growth and pushed unemployment upto record highs. To make matters worse for the bloc’s embattled populations, these measures have only merely touched the debt problem too.

Europe is only at the beginning of trying to solve its debt problems but in the process it has created two additional monsters: a gigantic unemployment rate and an effective zombie economy. Whilst Merkel, Barroso and regional level officials, believe “the worst is already behind us”, the real truth is, as evidenced so acutely with the issues in Cyprus in recent weeks, we not even touched the real problem: reducing debt.

Instead of continually kicking the can down the road, perhaps we now need to kick the elephant out of the room instead? European officials have been, possibly advertantly (as opposed to inadvertantly), punishing southern European countries, attempting to impose what is not patently inappropriate fiscal indiscipline without recognising the specificities of the situation. What this is doing is giving rise to growing anti-German sentiment. Sentiment that may put an end to the Eurozone.

Certainly, letting debts grow exponentially for the next generation(s) to pay is not only unfair, but also unsustainable. At some point the debt will cause a collapse (as if now is not bad enough) or will require hyperinflation and all the attendant social risks this entails, if something isn’t done. But tackling a debt problem when there is now growth and muted domestic consumptions is a virtually impossible task and will continue to result in very high social costs as the southern Europe countries are only too aware of.

It is true that no one cared about reducing or controlling debt in Portugal, Spain, or Greece in the past 10 years but similarly did the UK, Japan or the US? No, they didn’t. So why are southern European countries in the current situation? The answer is that they have lost control of their monetary policy – they just don’t have their own currencies. While the Japanese, the British and the American’s are merrily printing money, bailing out their own governments and citizens, those southern European countries are enduring both fiscal and monetary contraction at the same time – a killer cocktail. With a strong commitment towards cutting debt (imposed by the troika) and without monetary policy to soften such policy, these countries are at the heart of the worst economic crisis since after the 2nd world war.

Angela Merkel – German Chancellor

To many people, they believe that the Troika has been selfish and stupid. Does it make sense to contract fiscal and monetary policy at the same time while in crisis? Show me a textbook predicting an improvement of government finances after such a harsh program. There is none. If you are unemployed, you just can’t save. In order to reduce one’s debt you need a job.

The austerity that has been implemented has been catastrophic to Greece for example where employment will take more than 10 years to fully recover and debt to GDP ratios will only start decreasing when the world economy starts rising. Upto a certain point, the “fringe” economist Paul Krugman is right when he says the US economy should spend more to promote growth around the globe. This is not the  point to start saving at the risk of perpetuating the crisis.

Looking at the European Union’s economic metrics, one cannot fail to be frustrated. Just look at the following table highlighting important data for several Eurozone countries.

Greece had an unemployment rate of 7.7% in 2009 which rose to 12.5% in 2010, to 23.8% at the end of 2012, and is still expected to grow until 2014. Spain saw unemployment more than doubling between 2007 and 2009. Portugal is not much better, currently pointing to around 16%. While this has happened, France has also seen its unemployment grow from 8.4% in 2007 to 10.5% this year What does all this mean? Eurozone economic policy is destroying the south in favour of the north. Looking at Germany, it seems EU policy fits exactly the country needs. They have reduced unemployment whilst everybody else in the bloc has seen a contrary movement. As the crisis continues to pressure more sensitive and bigger economies like Spain and Italy, this is likely to prompt “enough is enough” calls from politicians in these countries sooner or later as the Italian elections evidenced with the return of the “bogey man” bunga bunga Berlusconi!

Debt-to-GDP for the region as a whole will in fact only start stabilising and dropping in 2014/15 when GDP growth is expected (hoped?) to reassert. GDP in the Eurozone is expected to decline 0.2% this year according to the IMF World Economic Outlook Database and I wouldn’t be surprised to see further downward revisions as the latest economic data inside the Eurozone is showing deteriorating conditions. Just look at PMI data, for example. The latest reading shown today points to contraction in manufacturing and services. For the twentieth consecutive month, manufacturing is contracting and the rate has been accelerating over the last few months.

Bank deposits, the engine of our system, are declining. Slowly and smoothly sure, but still declining. Nevertheless the EU still wants to alarm all depositors by imposing a levy on deposits held in Cyprus. That’s insane! But very favorable to Germany as money will continue to flow to those 1.39%-yielding-10-year-German Bonds.

Spain is at risk of seeing the country split into several regions, Italy can’t form a working Government, Greece is experiencing its very own Great Depression, and poor old Cyprus is closer to a Russian Union than to any European Union!

And so, Europe is heading towards a prolonged recession until the point that someone grasps the nettle and gets out of the Euro. The best candidate is in fact Germany, as the country is not tailored for the current union and is clearly in a different cycle making it impossible for the ECB to be a bank for its seventeen members and running the risk of being confused with the old Bundesbank. The current management is ruinous for hundreds of millions of people in Europe. Germany should exit the Euro in our opinion.