The Charm of Small: Benefits of Shrinking the Eurozone (Commentary)

by Dr. Kurt Hübner

The German center-right coalition sticks to its tune even when the rest of the orchestra builds toward a shrill crescendo. Jointly with Jens Weidmann, head of the Deutsche Bundesbank and her economic advisor, Chancellor Merkel steadfastly opposes all versions of Eurobonds and any decisive bond purchase program for the ECB. Weidmann may have gone furthest by arguing that both tools are in violation of existing European and German law. Yet saying Merkel would have a more nuanced position would miss the point. Both are not even pretending to be subtle. A look at two scenarios is needed in order to understand this hardliner stance. The first scenario postulates that the crisis mechanisms already in place, or are in the making, and the planned change in policy rules that would come with changes to the Treaty are sufficient to deal with an ever-escalating process. Moreover, the tune goes that those mechanisms are strong enough to handle a Greek default and can stop any contagion. Unfortunately, the probability of this scenario diminishes on a daily base. Internal devaluation kick-starts vicious circles where negative growth drives debt and deficit ratios up and thus generates increases in yield. Higher yields demand, in austerity logic, more cuts and cost reductions that result in an ever-lower growth dynamic and eventually in further increases of yield. Sooner than later this circle runs into economic and political walls.