Vicky Pryce, author of Greekonomics: The Euro crisis and why politicians don't get it, on the increasing isolation of the Germans over the Euro crisis
While in Munich for the glorious Champions League final last weekend (yes, I confess to being a Chelsea fan) I read in the Süddeutsche Zeitung a report on how Chancellor Merkel had suggested that Greece should run a referendum on euro membership at the same time as their repeat general elections, now scheduled for June 17. I had been joined in Munich by some Greek supporters of Chelsea and they were shaking their heads with incredulity that another government should, in fact, be telling Greece what to do in this respect.
It was later denied that Merkel had said anything of the sort but the damage was done. Everyone, including David Cameron, who has just had a downbeat IMF report on the UK economy to deal with himself, waded in, implying that events over the next few weeks, particularly the forthcoming Greek elections, were a de facto referendum on the euro and a make or break for the European currency. And that has started to affect trust in banks, a lot more widely than just in Greece. Spain of course has its own problems and has seen many of its banks downgraded but the inter-connectivity of financial markets has increased the fear of contagion.
It has also increased the Greeks' suspicion that Germany will only be satisfied if either their country leaves the Euro or comes under the complete scrutiny and control of Germany – in fiscal matters at any rate. Paranoia reigns!
But on the positive side, the recent events have concentrated the mind of the politicians. Germany is becoming increasingly isolated, as the G8 summit, and the discussions since, in advance of the supposed 'informal' summit dinner scheduled for May 23, have indicated. The mood among most leaders is towards focussing on ways to engineer as much growth as possible - without it the prospects of a meltdown are significant. The whispers now are that the Greek problems will be nothing compared to what may happen in Italy after the technocratic Prime Minister Monti goes in 2013, and that will be very difficult to contain if nothing changes in between. Italy has a debt to GDP ratio of 120% and rising, and no growth. It needs to reform just as much as Greece does although it has been able to shelter behind the fact that it has had a relatively successful industrial north. That is unlikely to continue.
Indeed, the OECD report of May 22 is forecasting a drop of -0.1% in the eurozone in 2012. It warns that the biggest downside risk in its forecast is the uncertainty over Europe. To counter it, the OECD recommends looking at a number of issues which are not a mile apart from what President Hollande is pushing for, and which are already backed by most leaders except Frau Merkel. And these are: more infrastructure spending through strengthening the capital base of the European Investment Bank; using the European Stability Mechanism to directly recapitalise stricken banks rather than letting already over-indebted countries do it by getting even deeper into debt; directing structural funds to growth generating activities ;and seriously considering the issuing of Eurobonds. The last will be difficult to swallow for the Germans but my suspicion is that in the end this is precisely what we will have.
Vicky Pryce is a City Economist and former Joint Head of the Government Economic Service