My understanding is that the Great Depression in the United States wasn’t really too bad until the collapse of the Creditanstalt bank in Austria caused a new wave of economic shocks. Meanwhile, nobody likes to pay attention to EU politics, which aren’t nearly as entertaining than the latest story about Michele Bachmann. But it’s striking to me that right now there seem to be two major schools of thought about the future of the Eurozone. One argues persuasively that since it’s in effect impossible for countries to leave the Euro, the Eurozone will introduce Eurobonds and move further to fiscal consolidation. The other argues, also persuasively, that it’s politically impossible to introduce Eurobonds and so countries will have to leave the Euro. Here’s Wolfgang Munchau:
I know there are people close to Ms Merkel and Mr Schäuble who agree that a eurobond will be the only solution to this crisis. I would not be surprised if they had even drawn up an emergency plan. But the politics is holding them back. Ms Merkel has a tough battle on her hands to secure a parliamentary majority for the extension of the EFSF. She will probably win it, but she might not win a fight over a eurobond. Her coalition would probably break up.
So, while I cannot see how Greece or Italy can remain in the eurozone indefinitely without a eurobond, I find it equally hard to see Germany, Finland and the Netherlands agreeing to it. So something will have to give. A small eurobond, covering only a small percentage of sovereign debt, looks a tempting fudge. But it would not solve the crisis. Perhaps a Social Democrat-led German government would accept eurobonds after elections scheduled for 2013. But that would be too late. Perhaps the next stage of the crisis will be so severe that everybody grows scared enough to accept it as a lesser evil. That might work, but it is not a scenario you would wish for.
Under the circumstance, people wanting to save Euros will naturally want to try to hold them in a German bank rather than an Italian one. But this kind of action exacerbates the crisis. I also wonder at which point does the government of Finland say to itself, maybe we should leave the Euro and leave the Germans holding the bag. Finnish Euroization is much more a political statement (“just because we’re not in NATO doesn’t mean we’re not part of Western Europe!”) than a practical economic policy for a country that doesn’t even border any other Eurozone members.