Brian Carney at the WSJ reports:
Seventeen years ago, Bernard Connolly foretold the misery that awaited the European Union. Given that he was an instrumental figure in the EU bureaucracy and publicly expressed his doubts in a book called “The Rotten Heart of Europe,” he was promptly fired. Mr. Connolly takes no pleasure now in having seen his prediction come true.
Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays “something like 10% of German GDP a year, every year, forever” to the crisis-hit countries to keep them in the euro. Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, ” ‘Well, we’ll chuck the whole lot of you out.’ Now, that’s not a very pleasant prospect.” He’s thinking specifically, in the chuck-’em-out scenario, about the rise of neo-fascists like the Golden Dawn faction in Greece.
The other “solution” is they leave the Eurozone.
Yet unemployment is close to 27% in Spain and Greece. The euro-zone economy shrank ever-faster throughout 2012. And—most important in Mr. Connolly’s view—the economic fundamentals in France are getting worse. This week France announced it would miss its deficit-reduction target for the year because of dimming growth prospects.
It’s one thing to bail out Greece or Ireland, Mr. Connolly says, but “if the Germans at some point think, ‘We’re going to have to bail out France, and on an ongoing, perpetual basis,’ will they do it? I don’t know. But that’s the question that has to be answered.”
Italy isn’t too flash either.
Which brings us back to the politics of the euro crisis. At some point, the people in the affected countries presumably will call a halt to the pain and sweep in a government willing to think the impossible—leaving the euro, for example.
To avoid that, Germany could well agree to pay for a transfer union, either believing that the transfers needn’t be permanent, or hoping they’d be less expensive than a euro break up. But, Mr. Connolly warns, once a mechanism is in place to transfer money from Germany to the current-account deficit countries, it’s only a matter of time before Germany is faced with the question of adding France to its list of dependents—something even Berlin may not be willing or able to afford.
I suspect Germany’s limit may come before even that.