The long-distance view from the high ground in Berlin isn't pretty. On the euro zone's Mediterranean edge, Greece lies at the bottom of the sea. Ireland, on the Atlantic fringe, is swamped. Below it, Portugal is slipping beneath the waves, while Spain, not yet listing, has ordered its crew into the bilges to plug the leaks.
The rescue boats, with Germany in the lead, have been dispatched with their cargoes of soggy euros. About €110-billion ($148-billion) has landed on Greece's shores. Another €90-billion or so is destined for Ireland. Little Portugal might require a less, but perhaps not by much. Germany prays that Spain will sail on unassisted, because the amounts required to keep it afloat might jeopardize the entire euro zone fleet.
Germany and its few wealthy euro zone colleagues must wonder how much longer it can afford such rescue missions. German taxpayers must be shocked that the rescues were required in the first place. Eleven years ago, when the euro was born, they were told the shiny new currency would be as stable as the mighty Deutsche mark and any country that lived beyond its means would not be bailed out, so fear not. Both assurances were shams. The euro has been highly volatile during the European debt crisis and the bailout tab for tiny Greece and Ireland alone is expected to be a monstrous €200-billion.
Many Germans believe the small, debt-mired countries are more trouble than they're worth and should politely drag themselves to the euro zone's frontier and wave goodbye, or get booted out if they decline to leave on their own volition. Let them take back their escudos, punts and drachmas. Those currencies may have been grubby little brutes, but at least they could be devalued. Doing so would make the weak countries more competitive, reducing their ongoing need for financing from afar.
Nice idea. Too bad it won't happen. Honour is at stake. No country wants to suffer the disgrace of being the first one out. There is no formal exit mechanism anyway. And the price of relaunching a national currency would be excruciating. The euro-denominated debts wouldn't disappear and devaluation of, say, 20 per cent would only make those debts 20 per cent more expensive to service. In other words, leaving the euro zone might be financial suicide for the weakest countries.
Still, there is no doubt that the German love affair with the euro is fading (opinion polls show as much). It will fade again if the loans extended to Greece and Ireland and other weaklings are not repaid. Take Ireland. Its post-bailout debt-to-GDP ratio is expected to soar to 120 per cent or more. How will Ireland pay that debt when it is the victim of endless, growth-clobbering austerity programs? On Wednesday, yet another one came, worth €15-billion over four years.
Crunching the numbers on public debt and budget deficits is easy as long as growth in gross domestic product is strong, as Canada found out in the 1990s. Absent growth, all bets are off. This week, Standard & Poor's cut Ireland's debt rating by two notches, with a "negative" outlook, meaning more downgrades are likely. S&P said "domestic demand [is]unlikely in our view to recover until 2012" while Ireland's central bank governor Patrick Honohan said his country's fiscal deterioration is "worse than almost any other country."
Simply put, Germany is afraid that the weak euro zone countries lack the wealth creation ability, now and perhaps forever, to avoid bailouts and pay back their loans once they receive the bailouts. The cost of stabilizing Greece, Ireland and possibly Portugal is gruesome enough, but imagine the price tag of a Spanish bailout, whose economy is 70 per cent larger than those three countries combined. London's Capital Economics estimated a Spanish fix-it bill at €420-billion - enough to drain what's left of the emergency bailout fund set up by the European Union and the International Monetary Fund.
If Germany realizes that it faces never-ending, and ever-rising, costs to keep the euro zone intact, and that the victim states will not ditch the euro of their own volition, it might be pushed into a radical move: Remove itself from the euro zone and put the mark back into action.
Many economists see this scenario as impossible. If Germany were to withdraw, Europe's greatest exporter would lose the ease of operating in a single market. The value of the mark, they say, would soar, hurting exports even more. Perhaps, but it's easy to forget that Germany, equipped with its iron-clad currency, didn't do so badly before the euro zone was invented. Germany may decide that the day is coming when staying in the euro zone is a bigger risk than pulling out. If Spain follows Greece and Ireland beneath the waves, that day may not be too far off.
Eric Reguly