02 April 2012

Gideon Rachman: The time bomb no one can defuse

Is there a way out of this euro-conundrum? Tuesday may see the first tentative answers emerge, with the announcement of the shortlist for the Wolfson Prize. Following the sound free-market principle that economic incentives can work wonders, Lord Wolfson, a Tory peer, has offered a prize of £250,000 for the best plan to break up the single European currency. If there is a safe way of defusing the euro-bomb, then the prize may offer the blueprint.

The fate of the euro will be decided in countries such as Greece, Spain, Italy and, above all, Germany. So it is significant that, behind the scenes, a debate about the break-up of the euro is also taking place among senior figures in the German establishment.

There was always a group of top German economists – call them the Bundesbank tendency – who had deep misgivings about the whole single currency project. Now some of these German sceptics believe their concerns are being vindicated and are even suggesting that – despite the current calm in the markets – Greece may have to leave the euro within months.

Ms Merkel’s view that the whole euro project would be gravely damaged by a Greek exit seems right. If, as the doomsayers predict, Greece was plunged into economic chaos after leaving, the rest of Europe could not simply stand by and watch. It would be sucked back into the resulting political and economic mess.

On the other hand, if a Greek exit went well, then other countries that are struggling inside the eurozone would be severely tempted to follow suit. There are senior Spanish officials, for example, who fear that another round of budgetary austerity – when youth unemployment is already at 45 per cent – could lead to political and economic devastation in Spain. They argue that financial and economic crises in other European nations have rarely been solved by structural reform alone. In the cases of both Sweden in the 1990s and Iceland over the past couple of years, they also involved a major devaluation of the currency to boost competitiveness – something that is impossible inside the euro. The implication is clear. Spain has to get out of the euro.

So far, these siren voices are being ignored because Spanish ministers – like their British counterparts – have been told that a euro break-up would lead to disaster. If the entrants to Lord Wolfson’s prize can show otherwise, they will have done the whole of Europe a service.

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View Graham Bishop's earlier comment on the Wolfson Prize here.

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