Walker's World: Euro's long slow fall

The euro is undergoing its ultimate stress test and so far it is failing. On current prospects, the whole prospect, and not just Greece's membership, may not be able to survive. The euro faces two immediate problems and they are inextricably interlinked. The immediate problem is the solvency of some of its leading banks, particularly in Spain. The second problem is that the only institutions that seem able to refinance them are national governments. But they need to borrow money to do so and their credit ratings are too low or the interest payments they would face are too high. And the Spanish government has just been hit with a new demand for a bailout from the regional government of Catalonia, on top of a new $23.8 billion bailout from the country's fourth largest bank. The immediate problem isn't so much Greece, which is quietly being written off, with the Lloyd's of London insurance group just the latest to admit to contingency plans for a Grexit, as a Greek exit is known. British Home Secretary Theresa May has announced plans to block Greek refugees flooding into the country if the Greek economy goes belly-up. The real worry this week is Spain, where banks are gasping for the credit that is the very air they need to breathe to survive, as floods of their depositors' money leave the country for the safer havens of German and British banks. Italian banks are facing a similar threat, with more than $125 billion having left the country, Citibank says. In this moment of despair for Greek bonds and Spanish banks, there is a third crisis under way: that of Europe's and above all Germany's political will. There is no shortage of proposed solutions for the euro crisis but each of them requires Germany to open its wallet, accept rather more inflation and modify its constitution to accept a European federal system of financial control. That would probably spell electoral suicide for any German government that tried it. "We are not willing to pour money into a bottomless pit," German Interior Minister Hans-Peter Friedrich declared over the weekend. Every other solution proposed, including the neo-Keynesian French plan for more public spending on infrastructure and job-training, still needs German money. The German government is working on its own 6- or 7-point plan, depending which leak one believes, which in effect offers Greece the same treatment that ex-communist East Germany received in the two decades after unification. It would turn Greece into a wholly owned Teutonic subsidiary, with German and EU civil servants running the economy and taking over businesses to restructure them, just as the German Treuhand system did after 1990. The main problem is that the East German solution took 20 years and $2 trillion. It would also require the Greeks to accept the same industrial and workplace discipline as East Germans, which seems a stretch. But the Germans are out of patience. Jurgen Fitschen, joint head of Deutsche Bank, was quoted in the German media over the weekend calling Greece, "a failed state, a corrupt state." And in France, Marine Le Pen of the Front National is telling campaign trail crowds ahead of next month's parliamentary elections that France shouldn't have to help Greece pay $2,250 a month pension to an assistant garbage truck driver who retired at age 51 when the French minimum wage is just one-third of that. It would be tempting for the rest of the world to turn their backs on their eurozone and its unending troubles and recurrent inability to fix them. But the European Union is still the world's biggest economy. Its slowdown has pushed China into a slowdown as its imports collapsed. Europe's woes have eroded the United States' hitherto booming exports and the euro crisis is looking to be the biggest single threat to U.S. President Barack Obama's re-election. Europe's banks aren't lending so its companies aren't investing so its consumers aren't spending, and so emergent markets from Turkey to Morocco, Malaysia to South Africa, are all feeling the pinch. The depressed exports of China and the United States are all part of the same pattern. But Europe's crisis isn't simply eroding growth elsewhere in the world, it is threatening a convulsion that would almost certainly trigger and new recession even deeper than the one that followed the Lehman brothers collapse in 2008.