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The Euro Battle: Lutheran vs. Latin Cultures

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MOODYS EUROZONE CRISIS
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"Eurogeddon," or currency Armageddon, appears to be inevitable due to the deep philosophical and cultural divide between eurozone members. But these differences also point to a reasonable exit from the current mess if the divide cannot be overcome which is to split the euro into two currencies.

In effect, there already are two currencies: the "Lutheran Euro," characterized by Germany, the Netherlands and Finland. The label has nothing to do with religion but with countries that are based on Protestant work ethic, discipline and thrift.

Then there is the "Latin Euro," characterized by France, Italy, Spain and Portugal, where style is often more important than substance and hard work can be a curiosity.

The euro crisis is this: The "Lutherans" are balking at bailing out the "Latins" led by France who argue that this is the only option to avoid Currency Armageddon.

Frankly, that is not true. There are four choices:

1. Bailing out Southern Europe by issuing eurobonds, and having the European Central Bank buy all the crummy bonds. This is unacceptable to Germany, and markets, and is simply the sovereign version of sub-prime mortgage bundling with triple-A credits and relabelling toxic debts as good credit risks.

2. The creation of a fiscal union as well as a monetary union. This is the only solution to keep the eurozone intact, but it means the Latins will have to take orders from the Lutherans. This can only happen if there is a complete meltdown.

3. Expelling members who default. This might shoot the Lutherans in the foot by leaving them responsible for the euro-denominated debts of the countries who left. German officials examined this option despite the negative consequences.

4. The best solution, to cut loses, would for the Lutherans to secede from the eurozone. The Germans, Dutch and Finns would form a new currency zone. But to keep down the value of their currency for export purposes, they would likely allow other current or future eurozone members to join, who they could dictate terms to and trust, such as the Czechs, Poles, Slovakians, Slovenians, Estonians, Austrians and Luxembourgers. Eventually, the Swedes and British might join.

This would benefit remaining eurozone members by triggering a massive euro depreciation. This would make them more competitive, more viable and less indebted through a reduction in the real value of their sovereign debts.

For Americans, Canadians and the rest of the world, the best option would be for the euro to stay but only if Germany takes control and dictates new rules to eurozone membership.

The lack of central management was why Britain opted out, and Margaret Thatcher famously warned that without fiscal/political union, a monetary union was doomed.

At the time, the euro proponents balked. But one response back then, by European Commission Chief Romano Prodi, revealed the cynical intent of the exercise and forewarned about the inevitability of the current clash: "The euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible now. But some day there will be a crisis and new instruments will be created."

In other words, brinkmanship was baked into the European Project Model. And maybe Prodi will be proven right. However, the new "economic policy instruments" are in dispute and time is running out for the dominant culture to subsume the less successful one or the Latins.

This week's failed German bund sale began the nail biting in earnest and perhaps it was orchestrated to accelerate the endgame. Some German financial newspapers pointed out that the issue was simply underpriced given uncertainties. Perhaps that was intentional.

Whatever the explanation, the continent is quickly marching toward meltdown: The removal of three leaders; the bund flop and downgrades of Belgium, Hungary and soon France. Bank credit is seizing up and markets are in disarray.

(By the way, it must be noted that the current structure of the eurozone was a win-win for a number of years: The membership and fiscal profligacy of the Latins dragged down the value of the euro, which greatly enhanced German exports; while the membership of the Lutherans helped the Latins pay dramatically lower interest rates than they otherwise would have.)

So the euro will survive only if Germany and its allies get their way by imposing central control over the Latins. If not, there will eventually be two euros in order to honestly reflect the effort and value of these two disparate regions.

Financial Post

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