The Guardian today quotes Angela Merkel as saying 'if that is what the euro has become perhaps we should join some other club'. Naturally a host of commentators have rushed to mention that Germany derives great benefit from the euro, and indeed this is the case. Germany exports a huge amount to countries on the periphery of Europe and if it left the currency union the remaining euro currency would fall against the new Deutsche Mark, pricing those exports out of the market.
But I think people are missing something here. Europe, America and Japan are awash with cash, and as signs of the recession fade some of that is going to have to be hauled in. Germans are terrified of inflation; they have all heard of the experiences in 1923 and are going to push for a tightening of monetary conditions just as others need them to be kept loose. To control inflation they will either need hugher interest rates or a stronger currency. What will happen then?
The problems of the euro go beyond sovereign default.
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