Could Germany quit euro over Greece crisis?

 

 

By Karl West

Last updated at 10:45 PM on 16th April 2010

 

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Economic crisis: A Greek flag flies in front of the house of Parliament in Athens. The country was yesterday edging closer to activating a bailout from fellow European Union countries

 

Germany may be poised to quit the euro to set up a smaller monetary union because of the Greek crisis, according to a leading City economist.

Athens was yesterday edging closer to activating a bailout from fellow European Union countries and the International Monetary Fund, which is due to send teams to the country on Monday.

But Joachim Fels, co-chief global economist at investment bank Morgan Stanley in London, warned the Greek rescue proposal sets a 'bad precedent' for eurozone member states and makes it more likely that the euro area 'degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures'.

Mr Fels suggested Berlin may be 'better off with a harder but smaller currency union'.

He added that 'recent developments significantly raise the long-term risk of a euro break-up' and that a 'scenario where a country or a group of countries want to leave to introduce a stronger currency is more likely than a scenario where a country, like Greece, wants to leave to devalue'.

Though Germany has not officially considered the proposal, Mr Fels' comments reflect the radical options being considered by EU member states as the situation in Greece worsens.

Yesterday Greek Prime Minister George Papandreou told his parliament that he was pushing through a painful austerity plan of public sector cost-cutting in order to prevent the country sinking. Athens needs to refinance about £46.4billion of sovereign debt this year, with a big chunk of that due before May 19.

David Mackie, head of European economics at JP Morgan, said: 'Being part of the euro area complicates the situation significantly. We would never underestimate the euro area's inclination to keep kicking the can down the road for as long as possible.'

Read more: http://www.dailymail.co.uk/news/worldnews/article-1266659/Could-Germany-quit-euro-Greece-crisis.html#ixzz0lJJ0FGKS

There is nothing fundamentally wrong with everyone having the same currency. The problem arises when one country's government takes on too much debt, and expects other nations to "monetize" the hole they've dug themselves into - meaning print enough extra cash to pay off their creditors.

 

All of these economic crises can be avoided very simply by just having a commodity-backed currency. That solution isn't on the table because the governments enjoy having the ability to take on debt - it's a way to hide the cost of their operations from voters. Raising taxes pays for things up front, but it also hurts your chances of getting reelected.

 

Central banking is the nasty side-effect of democracy.