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Straight Talking - September 2011

Roger Helmer's electronic newsletter from Strasbourg

Please feel free to distribute this newsletter, or to quote from it. It is primarily written for Conservative Party members and activists in the East Midlands, but may also be of interest to others concerned about developments in the EU. If you receive the newsletter second-hand and want to go onto the
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As I write (Sept 14th), Angela Merkel is set to video-conference with Nicolas Sarkozy of France and George Papandreou of Greece, in an increasingly desperate attempt to resolve the euro crisis. She wants to keep the euro-zone together and to get Greece out of recession, but she seems not to have realised that these two objectives are incompatible.

Meantime the Italian parliament is meeting to debate an even more aggressive austerity package, which may pass muster in the parliament, but may fail to do so in the streets.

Merkel's position has been undermined by German Economy Minister Philipp Roesler (a member of the minority party in the German coalition government), who says that a Greek default must be considered. Of course he's right.

The problem

Greece is in a debt spiral. If they try to spend their way out of trouble, they'll run out of lenders -- indeed they already have. But if they try to use further austerity to cut debt, they'll get negative growth. Either way they're deeper in the hole. So Merkel has a choice. Either she bails them out with German money, or she cuts them loose.

But of course the German electorate (and many German legislators, including some from Merkel's own party) have made it very clear that they're not prepared to keep on paying, over and over again, to keep Greece going. Over the last twenty years, Germany has spent massive sums bailing out the former East Germany (with disappointing results). There's no appetite for extending that sort of aid to the profligate and insolvent states of southern Europe.

Jürgen Stark, a senior German official at the ECB, has just resigned, apparently unable to stomach escalating ECB purchases of dodgy sovereign debt. His resignation has sparked panic in the eurozone.

Indeed given its very large holdings of suspect sovereign debt, the ECB itself is arguably insolvent (except to the extent that central banks can always print more money).

Then to add to the problem, we have contagion. We saw the share prices of French banks crash earlier this week because of their holdings of Greek debt. Banks across Europe are exposed to this risk, so when Greece goes down, there'll be a lot of collateral damage.

By the way, our former Conservative colleague Bill Newton Dunn, now a Lib-Dem, tells me that the euro is a strong currency and that Greece's problems are merely a little local difficulty. Yes, Bill. And pigs fly. And Nick Clegg is a great statesman.

The dangers of schadenfeude

It's awfully tempting to say "We told you so". Eurosceptics have been predicting this crash for a decade. We didn't quite know when or how, but we knew it was inevitable. And we were right.

But at the same time we have to face the fact that the British economy will suffer along with the rest, though our exposure to Greek debt is less than France or Germany. And the EU is our largest trading partner. It looks set for a long period of slow growth or recession, which won't help our recovery.

The dangers of delay

They used to say that the euro would not be allowed to fail, because there was too much political will behind it. But as Roger Bootle of Capital Economics put it so succinctly, no amount of political will can enable you to hit the moon with a peashooter. And no amount of political will can save the euro.

What it can do is to delay the inevitable. European politicians find it difficult to contemplate the failure of their pet project, so they cannot come to terms with the idea of an orderly break-up of the euro. We see this in Merkel's desperate attempts to reconcile the irreconcilable.

The solution

The first step in curing an alcoholic is for the patient to recognise the problem, and to admit that he's an alcoholic. The first step in solving the Greek problem is to recognise that it's in an unsustainable debt spiral, that further austerity is politically undeliverable and likely to cause civil unrest, and that no solution exists within the eurozone.

Technically, Greece could default within the eurozone. But this would further damage the currency's rapidly diminishing credibility. And locked into a currency which for Greece is grossly over-valued, the country could still not achieve growth, so default within the euro would be only a temporary solution. In a few years time, we'd have Greek Crisis Mark Two.

Greece must default and leave the euro. European banks will have to take the hit. And European leaders will have to consider whether Portugal and Ireland and Cyprus (and whisper it quietly -- Spain? Italy? Or even France?) should also leave.

I believe that a currency union of Germany, Austria, the Benelux and some Scandiwegian countries could work reasonably well (although I wouldn't necessarily recommend it).

The choice

As they say in bad gangster movies, we can do this the easy way, or we can do it the hard way. The (relatively) easy way would be to sit down and plan for an orderly break-up of the euro, thinking through the implications for European banks.

The hard way is to sit around in denial until the markets force a chaotic break-up -- which could be sooner rather than later. Merkel perhaps has no longer than this week to sort it. And I don't think she will.

Quote of the Month (1)

“(Steve) Hilton’s best proposal? Just toss European regulations in the bin. Spot on -- but we must be quick about it. Brussels is in a painful state of disarray, what with its joke currency collapsing. The EU has bullied us for long enough: let’s kick it when it’s down”.

Damian Thompson, Daily Telegraph, July 30th

Quote of the Month (2)

"I look at what is happening in EMU and the words that spring to mind are total and utter disaster".

Andrew Roberts - Credit Chief at RBS, Daily Telegraph, 12th September


That's it from Straz for this first September session. Please remember to visit this website, my blog at http://rogerhelmermep.wordpress.com, and follow me on Twitter: @RogerHelmerMEP