Without a European equivalent of Bernanke and Fed, Euro’s future looks very bleak. The dollar is bid, not because of its fundamentals, but by default as Euro faces an uncertain future.
The structural dichotomy that confronts the Euro runs in the psyche and grain of PIIGS and Northern European citizens. Euro has very little likelihood to survive in its present shape and geographical spread. It is mainly due to the diversity in the home ownership trends of PIIGS and Germans.
It is one of the most important structural differences that remained hidden when Maastricht convergence criterion was agreed. The habits of PIIGS and Germany have now erupted into a full bleeding rapture. Germans resist granting ECB a package equivalent of TARP, i.e., monetisation of debt or to print money. Without a Fed Reserve kind of massive leverage, ECB hands are tied. They have limited options without such a package, that is to say, to be a lender of last resort.
The principal reason behind German reluctance is that predominantly Germans don’t own houses, they lease. Leaseholders are most susceptible to price rises, on the contrary, PIIGS have the highest ownership of housing that is helped by rising prices. Germany is not prepared to sacrifice her tenants and Italians are not willing to forgo their homeowners to deteriorating packages of austerity.
Without a political unity there could have not been a monetary union, a fact the Europeans missed. Arkansas and California are two different economies but it is for the reason of ‘political unity’ that keeps Arkansas where it is and keeps California on a different economic cycle. In the name of convergence criterion Greek productivity was put at par with that of German, it was artificially maintained as capital inflows and indiscriminate loans maintained a decorum of equality of economies. Once the flow dried down the whole thing turns out to be a farce. Germany will have to deal this problem like they did for East German assimilation to German economy or just ditch the whole idea. It will cost PIIGS 30-40% of the GDP but will give them better competitive advantage and exchange of what they produce.
Germany can only help Euro zone, if they allow printing money for the advantage of the PIIGS nations to come out of the big crunch. This will be catastrophic for the tenants in Germany.
PIIGS led by: 1) Ireland: 83% 2) Italy: 78%
sit at the top of Home ownership and have the highest Home ownership in Europe.
German house ownership is 43 percent. The northern Europeans sit at the bottom of the table of Home ownership.
Germans rent inexpensively, and are remunerated well, their productivity fares better than the PIIGS. Hence their goods are well reputed and are reasonably priced.
No wonder PIIGS citizens individually are far more wealthy than Germany’s. Tarp-assisted help will eventually lead to a bout of inflation that will reduce their real value of debt and increase prices of their stock. Germans mostly do not enjoy this luxury across the board.
Germany will have to either let Euro go and in that case recapitalise their banks, a price they have to pay for allowing her banks to lend to PIIGS freely, or support the TARP equivalent. Politics demand the latter, common sense demands the former. It is far cheaper for Germans to recapitalise their banks and take a huge haircut in PIIGS’ credit than to commit to an umbilical cord of support that may take decades. ‘You cannot make a single currency without economic convergence and economic integration.’