Who should leave the eurozone — and it's not the PIIGS

Every iteration of the eurozone crisis so far has had one common factor: German intransigence. Peripheral countries shouldn’t approach Merkel as supplicant, but as equal. Instead of begging for bail-outs, the mantra should be “pay up or get out”.

  • 22 Nov 2011
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Debt isn’t a moral issue. Old fashioned folk may think it is, but the capital markets should know better. Germans lending money are not morally superior to Italians borrowing it — everything happens at the market-clearing price. Creditors need debtors just as much as debtors need creditors, at least in ordinary times.

So it seems a shame that nearly all discussion of the eurozone crisis has been couched in moral terms. Feckless borrowers from the “garlic belt” or “PIIGS” must work hard, tighten their belts and prepare to suffer. The capital markets are justly punishing them for their temerity in daring to borrow at the freely available market interest rates of the last decade.

Instead of internalising this sneering dismissal, the governments of southern Europe should be having a different conversation.

It should be something like: “Germans need to let us run monetary policy in accordance with our needs. If they can’t do that, they need to leave the eurozone. They’ve benefited from our exchange rate subsidy for too long. Those feckless Germans have been free-riding on our domestic demand for too long. Why can’t they design export products that they can sell at their own exchange rate?”

Actually, pushing the Germans out has a lot to recommend it.

Rebalancing monetary policy in the eurozone means either devaluation at the bottom, internal transfers, or revaluation at the top. Either a currency to allow southern countries to restore competitiveness, or fiscal transfer on a massive scale, or a currency to take northern Europe out of the euro.

The eurozone leadership can faff about designing a politically acceptable set of guarantee schemes, or leveraging up the EFSF, or whatever, but it will have to boil down to credible fiscal transfer in the long term.

Robert Jenkins, of the Bank of England’s Financial Policy Committee, has produced an excellent article explaining why the first option doesn’t work – the essence of it is that the panic and resulting capital flight makes today’s crisis look like an overnight fat finger.

Anyone with half an ear will know that the fiscal transfer option doesn’t work.

This isn’t to say that there won’t be a deal on it, perhaps even by the end of the year. But the deal will have no chance of lasting while Europe remains democratic. Merkel and Sarko might escape the fallout, but fiscal transfer on the scale required means whoever comes after them will have some serious explaining to do.

So that leaves kicking out at the top end — Germany, the Netherlands, Luxembourg, Finland (and probably Austria and Belgium for good measure, though they haven’t been immune from market jitters) — and redenominate into a new currency. Call it something like “Nordeuropa Mark”, or even the Guilder, all the better to avoid any allusion to Mitteleuropa.

The euro, as it stands, plunges in value. The ECB cuts interest rates as much as possible and starts up the printing press. The periphery can carry on its externally imposed austerity, and maybe even make long term strides towards competitiveness. But it can do this while running the right monetary policy for the region, restoring some prospect of growth — meaning some prospect of paying its debts.

Best of all, there is no default. The hard money headbangers that claim devaluation and default are equivalent are wrong. Default triggers CDS and stops investors lending money. Devaluation will hurt existing investors, particularly those in the Nordeuropamark region, but it should restore at a stroke confidence that euro-denominated bonds from southern Europe will get paid in euros, whatever they happen to be worth.

For the region’s banks, it’s good news too. Breaking the austerity cycle means fewer asset writedowns. Banks with northern European or foreign assets get to mark them back up — and provided the reporting currency is still euros, that’s fine.

The technocrats now in charge should get up off the mattress and give Germany an ultimatum. Pay up, or get out.

  • 22 Nov 2011

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 358,291.38 1348 9.06%
2 JPMorgan 320,704.66 1461 8.11%
3 Bank of America Merrill Lynch 318,128.31 1104 8.04%
4 Goldman Sachs 236,643.87 789 5.98%
5 Barclays 231,197.41 895 5.84%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 35,007.57 165 6.53%
2 Deutsche Bank 34,880.53 120 6.51%
3 Bank of America Merrill Lynch 31,805.65 97 5.93%
4 BNP Paribas 27,920.60 169 5.21%
5 SG Corporate & Investment Banking 24,398.89 138 4.55%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 19,745.92 80 8.85%
2 Morgan Stanley 16,334.63 83 7.32%
3 Citi 15,972.34 95 7.16%
4 UBS 15,487.17 60 6.94%
5 Goldman Sachs 14,053.61 76 6.30%