The two halves of the eurozone are locked in a broken marriage

 

By Ambrose Evans-Pritchard, International business editor

7:15PM GMT 30 Oct 2011

One by one, the democracies of Southern Europe are being broken on the wheel of monetary union.

Yes, Greece has gained debt relief: €100bn (£87bn) if pension funds "volunteer" to join banks in accepting a 50pc haircut. This will leave Greece with a public debt of 120pc of GDP in 2020 after nine years of depression, if all goes perfectly.

Greek ministers are now cruelly depicted in cartoons knuckling to German orders or delivering the Nazi salute. The yearly march commemorating the struggle against the Axis was blocked in Thessaloniki by protesters shouting "traitor" at Greece's aging president, himself a teenage resister.

I do not wish to be anti-German, since Germany itself is the chief diplomatic victim of EMU's unfolding tragedy. But this is what happens when you insert words such as "monitoring capacity on the ground" into EU summit texts.

Europe's inspectors are to establish an occupation office in Athens to ensure "full implementation" of austerity policies. Greece has been stripped even of the pretence of sovereignty, reduced to a Sanjak again.

Yes, Greece has gained debt relief: €100bn (£87bn) if pension funds "volunteer" to join banks in accepting a 50pc haircut. This will leave Greece with a public debt of 120pc of GDP in 2020 after nine years of depression, if all goes perfectly.

In Spain, unemployment is just shy of five million, or 21.5pc. There are 1.4m households where no family member has a job.

 

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The latest job losses have been in health care and schools, a foretaste of what will happen once the EU-imposed guillotine drops after this month's elections.

It is an unhappy starting point for an economy tipping back into recession. "We can't go on like this. It is impossible to get out this crisis with austerity alone," said Socialist leader Alfredo Rubalcaba, calling on Europe's Left to force a change in EU policy.

Meanwhile, Germany's jobless rate has fallen steadily to 6pc, and there lies the rub. EMU convergence never happened. What exists instead is a 30pc or 40pc North-South currency misalignment, the cause of all the grief.

The two halves are locked together in a broken marriage. The structural gap cannot be closed by debt-deflation in the South. It could arguably be mitigated by ECB reflation, yet the central bank has done the opposite, blighting the chances that Spain might just be able to struggle back to viability.

Spain is cutting stoically. The ECB did not have to have make matters worse by tightening monetary policy as well. It chose to do so, knowing that core inflation is tame and that Europe's banks are about to shrink their balance sheets drastically.

Portugal is already under EU-IMF administration, or "a state of occupation" in the words of Labour leader Carvalho da Silva. The unions have called a general strike this month.

This honourable nation, which pays its debts, has seen its external capital accounts swing from surplus to a deficit of 104pc of GDP under the perverse effects of EMU. The current account deficit is 8pc of GDP.

What Portugal needs is a 40pc devaluation against Germany. Instead, premier Pedro Passos Coelho is attempting an "internal devalution", with swingeing cuts to pay, pensions, welfare, and health. You cannot deflate an economy back to viability where total debt is 350pc of GDP. It is mathematical suicide.

Italy in turn has been told to balance its budget by 2013, even though it has a primary surplus and one of the lower debt levels (public and private) in the OECD club. This risks pushing Italy into a slump that sets off the destructive debt dynamic so widely feared.

It misdiagnoses the problem. Italy is in crisis because it cannot compete. It is in the wrong currency.

The EU refuses to confront the core issue, instead seeking to buy time for the South by conjuring a €1.2 trillion bail-out fund (EFSF) that seeks uber-leverage through "first loss" insurance of bonds.

This concentrates risk for creditors. It further endangers France's AAA rating, the foundation of the fund. It almost guarantees faster contagion to euroland's core. Europe has resorted to this twisted device because Germany has vetoed all moves to fiscal union, Eurobonds, debt-pooling, or ECB activism. It is a Hail Mary pass, a last gamble when all else fails.

Chancellor Angela Merkel warns that euro failure threatens a thousand plagues. "No one should think that another half-century of peace and prosperity is assured."

She has the matter backwards. The euro itself has become an engine of destruction and cross-border rancour. Europe will not be happy again until this misguided experiment is shut down.

The two halves of the eurozone are locked in a broken marriage - Telegraph