Eurointelligence notes that German politicians and media have embarked on a xenophobic anti-European rampage, reminiscent of the discourse of the 1930s.

The editorial by Jan Fleischbauer titled "the moochers of Rome" is seething with contempt. He wonders how to call those who finance their dolce far niente lifestyle with the money of others. No prizes for guessing whom he had in mind. And for good measure he writes that the beggar at least says thank you if you fill his bag. He concludes no respectable nation should asks for help if it can help itself. No respectable nation wants to be known as a moocher. Italians have long passed this stage he concludes.

The French magazine Marianne notes that the Spiegel cover displays arrogance, stereotypes and authoritarianism consistent with their coverage of the political crisis in Italy. It is not an example of solidarity.

After the injudicious comments by Günther Oettinger last week, other German politicians continued in a similar spirit. CDU MP Eckhardt Rehberg warned that Italy is playing with fire and putting the eurozone in danger. And Markus Ferber, a CSU MEP, told the ZDF that in the worst case scenario of insolvency the troika (IMF, ECB and Commission) should march towards Rome and take over control of the Italian finance ministry.

Andreas Kluth wrote in Handelsblatt that Germany represents the opposite of the ideas that unite the southern euro area. Kluth says these two sides cannot be reconciled in the long run, no matter how much Merkel fudges a solution in the short run. Instead the divide gives rise to cultural narratives that use the worst stereotypes. It is this chasm that dooms Emmanuel Macron's eurozone reform proposals, which Kluth refers to as southern-flavoured. He calls for the proponents to accept a shrinking of the union rather than jeopardising the whole eurozone. Of course, there was no reflection at all about Germany's own contribution to this crisis.

Lazy Italians and Ugly Germans

The Handelsblatt discusses 'Lazy Italians' and 'ugly Germans': How the euro sows discord

A common currency was supposed to unite Europeans. Instead, it increasingly divides them, as Italy showed again this week.

Listen to Matteo Salvini, leader of the right-wing League, one of the two populist parties that will form the next Italian government: “We have a basic principle,” hesaid. “Only Italians make decisions for Italy, not the Germans… A minister the Germans don’t like is exactly the right minister for us.” A colleague added that it was time “to free the country from the chains that Brussels and Berlin have put on our ankles.”

What, you might ask, did Germany even have to do with the events in Rome this week? Good question. Superficially, nothing.

Below the surface, however, Germany has a lot to do with Italy’s political crisis. That’s because Germany represents the opposite of the ideas that, more or less, unite the southern euro area, from Greece to France and Italy. Whereas the south demands “solidarity,” Germany fears a “transfer union,” in which northern money permanently subsidizes bad loans and fiscal licentiousness in the south. Where the south clamors for stimulus, Germany demands austerity. Where the south wants fiscal discretion, Germany insists on strict Ordoliberal rules.

North vs. South

As I have been discussing North vs South (Germany vs peripheral) for well over a decade. These are irreconcilable differences.

The structural flaws in the Euro itself are the root cause of much of the pain.

Structural Flaws

  • The ECB runs policy as "one size fits Germany". Yet, interest rates suitable for Germany are not suitable for other countries.
  • Productivity and regulations vary widely from country to country. Greece is a basket case of rules and regulations. French work rules are insane. Despite alleged "freedom of movement", try setting up a bake shop in Germany.
  • Target2 is a structural payment flaw with no solution.

Target2 Imbalances

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Target2, which guarantees repayments, is out of balance by close to €trillion.

  • Germany is owed €902.4 billion, mostly by Italy and Spain.
  • Italy owes creditors €426.4 billion.
  • Spain owes creditors €389.3 billion.

How the hell is this supposed to be paid back? The unadmitted answer is: It can't and won't unless the ECB steps in and bails Germany out.

The final structural flaw is it takes 100% agreement to change the treaty. This ensures that the Maastricht treaty which created the eurozone can never be revised in a meaningful way. The North-South divide is such there can never be changes.

Merkel compounded the problems with inept immigration policy.

Known Going In

The euro flaws were recognized going in. The bureaucrats insisted the Euro would bring nations together over time.

In good times, there was an illusion the idea worked.

A rise in populism everywhere, even in Germany, proves otherwise.

Lack of European Reform Will Break the Eurozone

Wolfgang Münchau, associate editor of the Financial Times, and founder of Eurointelligence says Lack of European reform, not Italy, will break the eurozone.

Once again, I agree with Münchau on what is happening but disagree about solutions.

Münchau proposes "Italy could use its weight in the upcoming appointments of the EU’s most important jobs: the presidents of the European Commission, the European Council and the ECB."

He concludes "If you are really pro-euro, my advice is to stop treating the euro as an article of faith but fight for its sustainability. That fight cannot be won in Italy alone. It requires big policy shifts in Brussels too."

Dream On

The structural flaws noted above show that a big shift in Brussels is impossible.

Moreover, Trump is widening the Eurozone split with his policies on Germany, Iran, and the Russia pipeline.

At least Münchau understands the need for Plan B (leaving). His plan A is structural Fantasyland.

Germany Will Pay

Germany will pay one way or another. Here are the possibilities.

  1. Germany and the creditor nations forgive enough debt for Europe to grow. This is the transfer union solution.
  2. Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe
  3. Breakup of the eurozone

Those are the alternatives.

Germany will not allow number 1. It is unreasonable to expect number 2 to last forever. The only door left open is door number 3.

The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences.

Unfortunately, the most likely outcome is a destructive breakup of the eurozone, starting in Italy or Greece.

Meanwhile, covers accusing Italy of being ungrateful moochers cannot possibly help matters.

For further discussion of the alternatives please see my September 2016 articles:

  1. Michael Pettis Calls Surplus Trade Statements by German Finance Minister “Utter Lunacy”
  2. Germany’s Finance Minister Blames ECB For German Trade Surplus; Why the Eurozone Will Destruct

Mike "Mish" Shedlock

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