4th August 2010
28 April 2010
Morgan Stanley is thinking the unthinkable and suggesting Germany may lead a break away out of the Eurozone in this article on FT Alphaville.
The comments are made by Morgan Stanley analyst Joachim Fels and noted with some excitement on the FT Alphaville website, beloved of traders everywhere.
Here is Fels' take in his own words: "The bailout and the ECB's softer collateral stance set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time.
"If so, countries with a high preference for price stability such as Germany might conclude that they would be better off with a harder but smaller currency union."
Fels' argument is that Germany may eventually run out of patience with its free spending, free borrowing, inflation-tolerant neighbours to the South (and West if one includes Ireland).
He says it is possible this may happen in the long term, but long term or not, even raising the prospect will send a chill down the spine of many a world leader and central banker.
Traders seem intrigued by the prospect. It does of course present just the sort of scope for arbitrage, shorting, re-rating and general carnage where fortunes can be won and lost and won over again…if you are trader.
Not all the comments are positive.
One or two point out how well Germany has done from Eurozone membership.
In the context of a post-crisis world, Germany isn't in bad shape just annoyed with the Greeks and perhaps a little sanctimonious.
Whether mere mortal, retail investors and savers would benefit seems unlikely.
Run for gold the call may go.
But just how likely is this to happen?
Well Fels is making some pretty sensible points.
He points out the serious strength of feeling in Germany about the Greek situation.
The Greeks have reciprocated but, of course, they don't hold the keys to the vault. Fels believes that the Greek bailout may make it more likely that other countries will not discipline their economies and their spending and borrowing.
Perhaps this is a case of moral hazard on a continental scale. He also believes that if the European Central Bank is soft on inflation, we may see Germany not just pining for the Bundesbank, but actively plotting to bring it back.
Part of his argument involves the fact that profligate members of the Euro zone cannot be kicked out. That seems pretty extreme but it was German Chancellor Angela Merkel who was wondering why this could not happen in the last few weeks.
But would Germany dare and what would the result be for the rest of us?
Let's think of a few things.
First what damage would it to the Governments and even democracy in southern Europe?
As for eastern and central Europe, they would be disinvited to the club even before they got the chance to join.
That is less of a problem for islands (i.e the UK) than small former communist states with an unpredictable Russia next door.
Would it wreck the whole EU project? Possibly.
Who on earth would join Germany? The Dutch? (I would bet all the tulips in Amsterdam on their going back to their own currency). Sarkozy? Maybe, but he has got to live with eternally bitter Spain and Italy on his southern borders. That is of course if he's invited.
There should be no doubts about the scale of the move.
This would be risking breaking up one of the biggest trading areas on the planet, a huge and influential force in the world, economically at least.
Sometimes that is forgotten, with all this talk of Euro stagnation and hand wringing about China rising.
What of Europe's global partners and global rivals.
It is hard to think Obama or Hu Jintao would have the stomach for more global instability even if long term, you could argue they might benefit.
As for Britain, in or out, this would hurt us. Not that there is any risk of the UK joining up to the project anytime soon.
Even the increasingly interesting outside bet for Prime Minister Lib Dem leader Nick Clegg says he was wrong to support our entrance to the Euro in the past.
But what would it mean for people's finances here?
Safe havens would probably be the order the day for a bit. And how would the pound do? Not that Germany can be over the moon at sterling's ‘competitive' valuation at present.
Bringing back the Mark, perhaps you could call it the Euromark, would only make it more so.
The UK might prove a safe location while everyone else in Europe worked out how they were going to pay for their food and clothes.
On a social, political, and economic level, the implications seem vast.
Would southern Europe be demoted to emerging market status, their bonds basically for junk for a decade or two.
How stable would Greece prove? We don't want to see the generals back.
Is there any way to do this smoothly and maintain social cohesion?
Or can the EU resolve some of its internal inconsistencies?
Would transfers of funds really resolve things or is the EU built on foundations of sand because it is a currency union without a genuine political union, its economies too diverse to be governed by one set of interest rates.
You may believe the economic contradictions mean that for all the political fallout, it might happen in the end.
Of course, the risk remains very small. But with Morgan Stanley identifying it, it does become a risk. Is Merkel rueing her harsh comments or merely playing hard ball and trying to get the rules enforced rather than trying to completely rewrite them?
If it did happen, we would certainly see some very big waves crashing up against our eastern and southern shorelines.
And the architects of the grand Euro single currency project might wish they had never had the idea in the first place.