Europe’s ‘huge decision’ over the euro

Germany’s decision to muzzle the ‘Wolf-pack’ of speculators is obfuscating the real issue.
 
As Chancellor Merkel herself said this morning: “Every one of us here can feel that the current crisis of the euro is the greatest challenge that Europe has faced for decades, since the signing of the Treaty of Rome”.
 
The Germans are abundantly aware that this is only marginally an issue about speculation. Really this is an issue about power.

The single currency was always a political construct of economics. Now if it is to remain intact, the economic union needs more political backup. A unified monetary policy for over a dozen nations was always going to require closer coordination of tax and spending policy, alongside ‘fiscal transfers’ from rich to poor parts of the union. What we are seeing now is the fitful start to a fiscal union.
 
Much has been made of riots in Athens, and strikes in Lisbon and Madrid. What really matters here is Frankfurt, Munich and Cologne.

Germany is acutely sensitive to its historical experience of inflation. Many in Europe’s paymaster are horrified as the European Central Bank inches towards printing money.

Germans are the guarantor of the ECB’s ballooning balance sheet. Through the ECB, and through the E750bn European Stabilisation Mechanism we are seeing the world’s biggest transfer of risk, from profligate Europe, to sober Europe.

It is a risk transfer analogous to October 2008 when a failing world banking system, dumped most of its risks on to the world’s governments.
 
It is inconceivable that Germany will stand back and watch this monumental support operation without being handed formal control of the purse-strings. Indeed this was one of the main early hours sticking points when the Euro bailout was signed last Sunday.

Germany did not trust the European Commission to be in charge of the E440 billion of bailout funds. So in a triumph of British economic diplomacy, power instead went to a Special Purpose Vehicle, likely to be more stringently controllable by Berlin.
 
But this is just a holding pattern. Stronger, yes, than the laughably-named ‘Stability and Growth Pact’ that was designed to rein in fiscal profligacy in Europe. But the endgame will have to be a more tightly-integrated European tax and spending. Or it will mean the disintegration of the euro.
 
This is the continent’s huge decision.