Roman ruins in Germany, a relic of the previous Eurozone
Last week it looked like the eurozone might be saved. Today, it looks like the eurozone might be toast—err, crostini.
Last week was about Greece, with its tiny economy and tiny political problems (which looked enormous last week). This week, it's about much larger Italy, with its rather large economy and political problems that make last summer's US debt ceiling shenanigans look like a lecture at the Rose Society.
Silvio Berlusconi has been compared to Nero, fiddling while Rome burns, but he's ruled more like Hadrian, doling out favours designed to keep him popular. (History lesson: upon coming into power, Hadrian actually burned the wax tablets containing "promissory notes", the debt of political cronies, to show debtors what a great guy he was. He also, like Berlusconi, spent a lot of time with his young lover.)
Berlusconi, a former cruise ship crooner, is incapable of understanding his country's financial problems, much less solving them. Yet he hangs on to power by a thread, despite a vague promise to resign. Surely his $4 billion fortune is enough to start a new life somewhere—perhaps there's a Greek island he could buy.
Meanwhile in Greece, George Papandreou has officially resigned and a new government is to be formed, partly made up of the political party who previously helped to hide Greece's debt. That doesn't exactly bode well, does it?
But the real political problem actually is Germany, and its stern chancellor, Angela Merkel. In the eurozone, mighty Germany calls the shots. While Germany is committed to keeping the eurozone intact, it's even more committed to avoiding its old nemesis, inflation. (History lesson: hyperinflation in the 1920s led to hyperausterity, which led to Hitler.)
If the eurozone is going to survive, it will have to devalue its currency, and print some notes to help its poor periphery neighbors—Greece, Portugal, Spain, and now Italy. (Italy, despite the current problems, isn't really so poor—they export a lot of pasta to their neighbors and could grow their way out of this, if they had their own currency. A devalued lira would mean the world buys more pasta.) That means Germany will have to accept a higher level of inflation, which will have the added benefit of making those euro debts worth less.
Yet Germany can't bring itself to go there. Nor can they stomach the idea of doling out euronotes to their profligate neighbors, the only other option to saving the eurozone (at least that was an option before Italy and its oversized obligations came knocking at the euro door).
Angela and her countrymen are going to have to make a stark choice: Accept some inflation, or figure out how to live without the eurozone. That's why an offhand suggestion I heard last week, that the real solution to the Euromess would be for Germany to leave the eurozone, makes an ironic sort of sense.
Germany needs to take her toys and go home, and let France and the European Central Bank sort out the Euromess. Otherwise, there may be no one left to sell BMWs to.
(For more detailed analysis, read Martin Wolf at Financial Times, Ezra Klein at The Washington Post, or Paul Krugman at the The New York Times. All three come to similar conclusions: this is Germany's eurozone to lose.)
