Wednesday, June 01, 2005

He Would Say That Wouldn't He II

In some ways I think this story may run and run over the months to come. Bloomberg have an update on their earlier article. According to the latest account:

1/. The German Finance Ministry have declined to comment on the Stern report that discussions took place last week between Finance Minister Hans Eichel, Bundesbank President Axel Weber and various economists on a possible failure of European Monetary Union.

2/. Stern magazine have been forced to pre-release the article today: it asserts that the above mentioned group discussed a scenario for the single currency's collapse as differences in inflation and growth rates within the union grow. An internal ministry document formed the basis of discussions. (All this, as I keep saying is perfectly plausible, since it describes a reality - the difference in inflation and growth rates, and incidentally balance of payments situations - the scenario is simply that, a scenario, a thought experiment. This reality is only really strongly denied by the Chief Economist at the ECB Otmar Issing).

3/. The Finance Ministry - in the shape of spokesperson Sandra Hildebrandt - has clarified that it "doesn't comment on internal papers or meetings". This implies, since there is no denial, that there was a meeting and that there is a paper.

4/. Stern suggest that Fels said: Inflation and growth differentials ``can lead to a meltdown in a couple of years, the collapse of the euro,'' . This doesn't especially ring true as I have strong doubts that he would commit to a time scale. This sounds like journalese. Not what he said in a meeting. And since Fels is now 'missing' (possibly he is the most wanted man in Europe right now) I doubt they would have got this out of him in a phone interview.

What is Fels saying:

"I think, that Europe is on a slippery slope towards disintegration and instability -- a stunning reversal of the long march towards integration and stability in the last half-century. Of course, nobody can confidently predict the endgame of such developments."

"First, political disunity within Europe raises doubts about the long-run viability of the euro."

"a disunited Europe could also lead to plausible scenarios characterized by fiscal and monetary instability in which some member states would want to leave the single currency. Investors in long-dated eurozone bonds have to factor in the break-up risk and should demand a premium in bond yields. Needless to say, the permanent spectre of a potential break-up should also make it difficult for the euro to rival the dollar?s status as a reserve currency."

The above can be found here.


"Far more worryingly, the European Union (EU) appears to be heading for a serious political crisis, which could, eventually, even put the single currency at risk. The currency markets may have started to smell these risks: the euro failed to rally against the dollar last week despite a larger-than-expected US current account deficit and accumulating signs of a slowing US economy."

This was back in April.

I would happily sign on the dotted line to any of this, but it is nothing like what Stern attribute to him.

5/. The document also asserts that: "The gap risks widening, so that the danger of an adjustment crisis is growing bigger,''. This is plausible, in particular since it is true.

6/. And possibly most interestingly of all: Germany's lower house of parliament has commissioned a legal opinion on a possible reversal of EMU and the right of one of its members to leave the currency. This is asserted by Stern. I have no idea if it has any validity, but it would be surprising if they made this claim without backing. My impression is that someone somewhere, probably someone who has been against the euro from the begining, is leaking.

Lastly Stern claim: " The introduction of the euro has cost Germany its former advantage of lower financing costs, which partially explains why it's lagging behind the other euro members". This is balderdash. The ECB rate is extremely low by historic standards. The rate could and should come down to meet Germany's present needs, but that is not what Stern appear to be saying.

The interesting question now is whether the euro will become an election issue in Germany. Over to Brussels and Frankfurt tomorrow.

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