The fate of the euro is in the hands of Germany

The Telegraph UK (Link) (July 14, 2011)

The Italian parliament�s endorsement of a �40 billion austerity package has temporarily eased the turmoil in the eurozone but will not end it.

Yesterday�s vote in the senate, to be confirmed by the lower house today, marked a truce in the political in-fighting in Rome that had placed the debt reduction strategy in peril.

A successful, if expensive, sale of Italian government bonds also helped steady nerves amid fears that the eurozone contagion was spreading to one of its biggest economies.

Speculation that the European Central Bank stepped in to buy Italy�s debt has not been confirmed, but would be significant if true.

It would suggest that the ECB is finally trying to put together a strategy to contain the crisis. The piecemeal approach it has so far adopted is simply not good enough.

Indeed, further turbulence could well be triggered today when stress tests on European banks are published to reveal how exposed they are to sovereign debt.

As David Cameron said in the Commons on Wednesday: �Eurozone countries have to recognise that they have to do more together and faster; they have to get ahead of the market rather than just respond to the next crisis.�

But how? Restoring fiscal credibility by reducing deficits is essential. Unless the countries that gorged on cheap credit are now prepared to cut back substantially, the bail-out budget will not be enough to cover the worst-case scenarios, in which Italy and Spain would need rescuing.

Economists believe the existing rescue fund might need to be raised to a colossal two trillion euros to end market fears that indebted eurozone countries cannot be supported.

This, of course, goes to the heart of the matter: the refusal of the eurozone, and Germany in particular, to face up to the ramifications of monetary union. The principal architects of the euro � Jacques Delors, Helmut Kohl and Fran�ois Mitterrand � presumably knew what they were doing.

They wanted political union and saw a common currency as a way to achieve it, just as Margaret Thatcher predicted at the Rome summit in 1990 that precipitated her downfall. Twenty years on, Germany, as Europe�s powerhouse economy, is now confronted with the logic of what it agreed to then.

Either it can go for full integration, with EU control over budgets and taxes, allowing for fiscal transfers around the eurozone and thereby removing the sovereign debt uncertainty surrounding the weakest members; or it can pull out of the euro, which is clearly not something it wants to do, since this would wreck the political project; or it can wait for further crises to hit, each one worse than the last.

In the end, this is not really about Greece or Italy or Ireland. It is, as it has always been, about Germany. �