By Ambrose Evans-Pritchard Economics © Copyright of Telegraph Media Group Limited 2011
While we are waiting for Mario and Merkozy plus, just a quick thought on one of the EMU break-up reports hitting my desk daily, and sometimes in twos and threes.
(Ah, how I look back to those halcyon days when it was just we happy few, we band of brothers, a tiny handful of Little Englanders, Danes, Swedes, cheese-eating Souverainistes, and Czech patriots, against the crushing force of orthodoxy.)
The Dutch bank ING has had another go at the numbers, calculating that the Greek Drachma would fall by 80pc against the D-Mark in a full-blown disintegration.
The Escudo and the Peseta would fall by 50pc, and the Lira and the Punt by 25pc. Germany would suffer a “deflationary shock”.
The whole eurozone would crash into depression, with a GDP contraction of around 9pc in 2012 — Germany (-7.4), France (-9.1), Portugal (-12.7), Greece (-13.1).
Outside: UK (-5), Poland (-6.6), US (-0.2), Japan (-1.1). The price of oil would drop to $55 a barrel. The US would flirt with deflation.
The contraction would continue into 2013, before gradually stabilizing.
“Events of the past year have proved beyond doubt that the Eurozone is far from a textbook `optimal currency area’. But this is an omelette that cannot readily be unscrambled ,” said ING’s Mark Cliffe. Oddly enough, I lunched with Mr Cliffe days before the ERM blew up in September 1992, so this all has a funny feel to me.
His report is less dire than a UBS note predicting a 50pc collapse in peripheral GDP, and 20pc to 25pc in the core, but it still begs the question: If the intra-EMU currency misalignment is so extreme that free floats would cut Greece by 80pc, and Spain by 50pc, it surely validates the eurosceptic argument that monetary union has become a preposterous and unworkable arrangement.
It will take hideous contortions to hold the system together for year after year if ING is close to right on these numbers, with perma-slump, endless austerity, and ever greater macro-economic absurdities, so why persist? Actually, I don’t agree that Spain is such a basket case. Its exports have bounced back briskly – almost at a German pace – since the Great Recession.
Spain reminds me of the UK in 1992 when the mantra was that Britain had run into trouble because it joined the ERM at an over-valued rate of D-Mark 2.95.
A decade later the pound was slightly stronger at 3.20 (synthetic D-Mark). In reality, sterling was in crisis in 1992 because the UK cycle (recession) was not aligned with the German cycle (overheating). The issue was the wrong interest rate, not the wrong exchange rate.
Spain has some of the same problems today, though excess house construction has been far more extreme than the UK in 1992, and the economy is about 15pc over-valued on unit labour costs. Bad, but not hopeless.
In my view, Spain would have some chance of making it in EMU despite past mistakes if the overall policy in Euroland were less contractionary. Unfortunately, the country’s best efforts over the last year have been blown to pieces by 1930s policy-makers and Neo-Calvinists.
Be that as it may, ING’s Mr Cliffe does not agree with those who think the D-Mark will soar against the dollar after a break-up, mimicking the Swiss franc. It will be sucked down by depression and mayhem.
Nor would the euro rally after spinning Greece back into the Aegean. The residual core currency would plunge below dollar parity, and perhaps below $0.85. “The notion of irreversibility of EMU would be shattered forever,” he said.
“Our base case remains that EMU will survive, courtesy of a ‘grand bargain’ that exchanges tighter fiscal discipline and economic reform for German support for ECB action to aid the funding of peripheral governments and banks and a commitment to launch a common Eurozone government bond.”
Well, maybe, but they had better get on with it.
The report does not address the proposal of ex-BDI chief Hans-Olaf Henkel: that Germany and the Kaisertreu should leave EMU to the Latins, orchestrating an orderly North-South divorce.
Many readers point out that this would be impossible to carry out. The moment anybody got whiff of such planning, there would be an instant run on the banks and sovereign debt of the southern bloc.
So yes, those readers are right. Even German withdrawal would be absolutely bloody. There is no clean way out of this.
The question is which do you prefer: a horrible end, or endless horror?