All that has occurred so far is that Irish and Greek taxpayers have taken on fresh debt so that creditors do not crystallise losses. It remains a disguised rescue for North European banks and insurers. As the Left always warned, monetary union is a “bankers’ ramp”.
Perhaps this bank rescue is necessary to buy time for a fragile financial system. We saw instant contagion through half of Europe when Mrs Merkel called for bondholder haircuts in October. It was she who clumsily set off the final Irish crisis. But if EU banks are so vulnerable, how did so many pass their stress tests in July?
Ireland perhaps has a theoretical chance of surviving Merkel’s penal rates. How its democracy will react to this is an open question. A Fine Gael-led government may be elected this week. We will find out how long Ireland is willing to suffer debt servitude to pay German, British, and Belgian banks.
Greece has no theoretical chance. Nobody other than those paid to apologise for this travesty of a policy believes Greece can escape a compound interest spiral under an EU-IMF regime that will push public debt to 150pc of GDP.
The inspectors know this, hence pressure on Athens to sell €50bn of assets, including water and land. This too is becoming neuralgic. “Unacceptable behaviour,” said premier George Papandreou. Greece will not bargain away its “birthright and dignity”.
Nor do I believe that Portugal can regain its footing in EMU with combined public and private debt at 330pc of GDP and a current account deficit stuck near 9pc. Whether or not Portugal accepts a formal rescue has become irrelevant. It is already on life-support from the European Central Bank, which had to intervene yet again last week after Portugal’s five-year yields hit a post-EMU record. A rescue merely switches that support to a different EU body, the Stability Facility (EFSF).
A few months ago, capital flight might have spread instantly from Portugal to Spain. Events have since moved on. Spain’s industrial orders and exports are recovering. Its fiscal deficit is narrowing fast. Its bond spreads no longer move in rhythm with Lisbon’s troubles.
Global growth has alleviated the liquidity crisis. I share the view of Albert Edwards at Societe Generale that this is a deformed economic recovery built on extreme levels of government debt across the West and highly-questionable use of monetary policy to inflate stock markets, but it may take some time for the chickens to come home to roost.
What continues, regardless, is a chronic crisis of varying degrees in peripheral EMU nations that have lost competitiveness and are stuck in a slowly-tightening debt trap. High-interest loans are no help for insolvent countries. They need debt forgiveness and years of subsidies, if they are to muddle through in EMU. Is this forthcoming?
Werner Hoyer, Germany’s Europe minister, said last week that EU federal bonds would be "politically unrealistic and legally impossible", fearing the wrath of Germany’s constitutional court.
Mrs Merkel appears ready to back a boost in the EFSF’s lending power to €500bn, so long as other states swallow her “Competitiveness Pact”. This Diktat requires non-Germans to reshape their societies in Germany’s mould. They have told her to go to Hell. Even Belgium’s premier said the German demarche was outrageous.
She has not agreed to reduce the EFSF’s penal rates, or allow it to help crippled states buy back their own bonds on the open market at a discount. This may change. It has not happened yet.
She has certainly not agreed to any form of transfers and cannot do so given the fierce mood of her Free Democrats (FDP) and Bavarian allies. She would not dream of accepting that Germany should do for Club Med and Ireland what it has already done for its own kin in the Eastern Lander.
Western Germany has shelled out €1.7 trillion to the East since reunification 20 years ago. It is still paying €60bn annually, and has not yet achieved viable convergence. Transfer costs are docked from the pay of each German worker under 'Solidaritätszuschlag’, which rises to 5.5pc of income tax.
There may be some sort of “breakthrough” at next month’s EU summit – perhaps on EFSF bond purchases - but Mrs Merkel is deeply constrained at home. Comments by Bundesbank chief Axel Weber that he could not serve as ECB chief because the institution had strayed from orthodoxy and left him in a “minority” were frankly calamitous.
There can no longer be any doubt that Germany has lost control of the ECB, that the implicit contract under which the German people agreed to give up the D-Mark has been breached.
The eight judges of the Verfassungsgericht ruled on the Maastricht Treaty in 1993 that EMU failure to ensure monetary stability in Germany would violate the Grundgesetz and either force Germany to change its constitution (very hard) or leave the euro. Is Dr Weber inviting the court to plunge the dagger when it rules, perhaps soon?
The Weber debacle comes at a bad moment. Germany is already in full cyclical upswing and needs higher rates, even as the South languishes in a slump. Jim O’Neill from Goldman Sachs said Germany had decoupled from Europe, becoming the first “developed BRIC” as supplier in chief to China’s industrial revolution. “The Germans are going to have to accept 3pc inflation, even if they don’t know it yet,” he said.
Or 4pc, or 5pc. Germany’s producer price inflation reached 5.7pc in January. The country is hitting capacity limits. Yet ECB rates are still 1pc. This has the makings of an almighty punch-up.
Global recovery does not end the North-South rift that lies at the root of the eurozone crisis. It merely changes the features of it, and shifts the focus of stress.
EMU travails will goes on, and on, until Germany – and the others – understands that it has been lured into a Monet trap: it cannot both be a member of monetary union and remain a self-governing sovereign nation. In politics as in life, you must choose.
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