Has Germany just killed the dream of a European superstate?

While the US was focused on the health care drama over the weekend, over across the pond events are rapidly deteriorating in euro land. For this week's Outside the Box I offer two columns, one from the Financial Times and another from the London Telegraph. Both describe the problems that the eurozone faces. It is not pretty.

I was sent this note from a Steve Stough who translated this from a German TV news show' It is a nice set-up for the two short columns.

I was reading an interview with Germany's most-quoted economist and then, all of a sudden, his face pops up on a TV show (a panel discussion on Germany's version of Fox Business News) at the same time, so I paid close attention. Hans-Werner Sinn's remarks are apparently listened to as closely as are the Federal Reserve Chairman's remarks in the US. He said:

• The Greek drama will have a 'frightful' ('schreklich') ending no matter which course of action is taken. The objective is to avoid having a Greek default trigger another banking crisis across the EU.
  
• The EU member states are too financially fragile to take on any flaky Greek debt. The actual Greek deficit is running at 16% of GDP, not 12% as previously reported. Greece is in a deepening retraction, not a recovery, as previously claimed. [Germany's social security, welfare, unemployment, and health care entitlement programs are all running cash-negative or soon will be, but that is another subject entirely. Angela Merkel has a committee established to work on tax reform, meaning tax rate reductions - Steve].
  
• There are three bad alternatives. He recommends #3 (effectively, default):
  1. A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said 'no,' and so did Guido Westerwelle (her coalition partner and foreign minister).
     
  2. IMF loans. Dr. Sinn believes that this would accelerate the Greek economic contraction with a dramatic deflation of wages and prices, which could lead to civil war, revolution and a political destabilization of the area.
     
  3. Exit the Euro zone, revive the Drachma, re-denominate the sovereign bonds in Drachma, let the Drachma collapse, and rebuild after the collapse, largely on tourist remittances Assuming a small amount of domestic (internal) default, this would be the least-painful to the Greek populace, but German banks and investors would lose approximately $38 Bn in bond investments +/- what can be recovered after the Greek economy recovers. Eventually, Greece would be allowed to re-join the EU.
• Formation of an EU monetary fund is out of the question, he believes, because it requires treaty modifications that might take many years to pass.
  
• As an aside, he said that if German tax rates are not lowered, that Germany will slide back into recession.

Steve Stough

As a quick aside, I know I said two weeks ago that I would do an assessment of the affect of taxes on the US economy. I decided to hold off until we can see what the health care taxes rally look like, rather than guessing. I will get to it, as I am quite curious as to the total level of the tax increases.

Now, to this week's OTB.

John Mauldin, Editor
Outside the Box

subscribers@mauldineconomics.com

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Has Germany just killed the dream of a European superstate?

By Ambrose Evans-Pritchard from the Telegraph

German Chancellor Angela Merkel has little hope of selling a bail-out of Greece to German voters

German and Dutch leaders have concluded in the nick of time that they cannot defy the will of their sovereign parliaments by…