The challenge I refer to is how to keep the Euro monetary system together and how to make it sustainable for the longer term.
It is in everybody's interest that this is achieved, as the consequences of failure are just too great:
- If any member is forced to leave the Euro the markets will certainly start challenging the Euro longevity and will start considering it as a loose fixed exchange regime rather than as indissoluble monetary union. The question of who comes next will unavoidably force the market to test the hypothesis.
- If the Euro monetary union dissolves the sustainability of the EU will also be challenged.
- From dissolution all members would suffer.
- Debtor nations will suffer default, blockage out of the international capital markets for a long time, and sharp devaluation of the domestic currency which will be large and will hurt mostly the fixed income earners who are least able to carry the burden.
- Creditor nations will see their home currencies appreciate forcing instant loss of competitiveness just at a time when European demand will shrink making it a strong double blow.
- Countries in distress will have to introduce strict capital controls and adopt beggar thy neighbour policies which will fly in the face of all that the EU stands for and would threaten the achievements of the last half century.
- Countries in distress will seek help from wherever they can get it, including the devil if one exists. Russia and China would be most pleased to oblige if in the process they can weaken European Unity and weaken the security arrangements which tie the European continent with the West.
So firstly European leaders, especially those in core countries which are in a Creditor position, are failing in making no effort to explain to their electorates the severe consequences of risking a Euro dissolution.
They are also failing in not raising the sensitivity of their electorates to the huge benefits that they are having from the Euro crisis. Just consider that Germany, whose debt to GDP is well over the 60% Maastricht limit, is now paying negligible interest rates on debt as it gets renewed and this week the German Bund - 5 years slipped into negative territory i.e. lenders are paying the German Government for the privilege of lending it money.
Also Germany is running a 7% of GDP surplus on its Balance of Payments which would not have been possible without the Euro monetary union as the Deutsche Mark would have appreciated to self-correct such disequilibrium. This huge surplus is keeping the German economy humming with export orders.
So all in all, if the Creditor country leaders were to make their electorates aware and sensitive to these huge benefits, then the need to restore equilibrium inside the Euro monetary system by dual action from the deficit a much as from the surplus side would be much more evident and acceptable.
It is in everybody's interest that Debtor nations apart from helping themselves, which is a pre-requisite, are given help so as to make their economy grow sustainably. Restructuring in the absence of economic growth is well neigh impossible. Without economic growth Debtor nations will default, hurting themselves and their Creditors, and bring the Euro monetary system to a premature demise.
The Euro members must learn from The Marshall Plan not from the Versailles Treaty.