Self-help best solution for euro

Europe should fix its own problems instead of turning to China (plus the IMF, Brazil, Japan, Russia, etc), according to our web poll last week.

The eurozone crisis worsened after we asked the question. Greece’s premier, George Papandreou, briefly flirted with the idea of asking voters to decide whether they would accept the austerity measures demanded in the EU’s rescue package, sparking fury in France and Germany, and causing a mild panic in the markets.

Nicolas Sarkozy and Angela Merkel, the French and German leaders, even raised the spectre of Greece quitting the euro, which Morgan Stanley’s chief global economist compared to the opening of “Pandora’s box”.

The threat was enough to force Papandreou to back down and Greece has now started to fall into line.

Even so, the euro remains mired in an existential crisis. Southern European countries are so mired in debt that their natural way out is to inflate them away by printing money, but in the euro, Germany controls the presses and will not tolerate inflation at the levels needed to achieve this. And even if it tried, German exporters would be the main beneficiaries, rather than Greek households.

An exit from the euro would hardly be much better. What would happen to all the euros in Greece after the government announced its decision to convert them back into drachmas? Inevitably, the Greeks would face a ruinous run that would close its banking system, perhaps for months.

“All this could be avoided, you might say, if the decision was taken in secret and announced as a fait accompli,” speculated Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley, back in June. “Residents would wake up one morning and be told that their euro stocks, bonds, cash and bank deposits had all been converted into drachma. End of story. But it is not a plausible story. This scenario might be possible in a dictatorship but not in the world’s oldest democracy.”

With little chance of inflation any time soon and a return to the drachma seeming unlikely, a bailout is the only realistic option. Germany can afford to pay for it, but the country’s voters are fed up and refuse to tolerate the idea, forcing eurozone leaders to consider turning to others for help that they are unwilling to give to themselves.

It is an odd situation, but at some point Germany will be forced to bail out Greece and accept the consequences of a transfer union in which the richer countries support the poorer ones. But it will probably only happen with a minute to spare on the eve of the euro’s collapse.