By engulfing Italy, the euro crisis has entered a perilous new phase—with the single currency itself now at risk

@tp1024

".....you find that the share of exports in GDP of Germany virtually exploded as soon as the Euro was effectively introduced. It doubled from about 27% in 1998 to about 54% in 2011."

Just one question here: how much did German exports increase within the Eurozone ans how much to the rest of the world?

Personally I don'y see Germany as "the main culprit". Germany just keeps on doing what they always did and what they do best: turning out top class industrial products, anything from pharmaceuticals to luxury cars to power stations, etc. In my opinion the main culprit are those who live beyond their means. After all nobody forced anybody to buy German products they could not afford.

And by the way when you write that Germany ".....has turned into Europe's economic powerhouse without most people in Germany itself seeming to benefit from this fact" I tend to disagree. The living standard in Germany is just as high as anywhere else in comparable countries; look at the cars they drive, their housing standards, their social security system, the restaurants, Gasthauses and wine bars which are all well frequented, not to mention millions of Germans taking their holidays abroad.

Silvio must go. Silvio must go. Silvio must go. Silvio must go. Silvio must go. Silvio must go. Silvio must go. Silvio must go...

It took long enough for Europe's leaders to wake up to the exigencies of Arab democracy... How long will it take for Europe's leaders to wake up to the need to condemn Berlusconi's undemocratic domination of the Italian media?
Any reasonably competent - even any reasonably incompetent government in Rome would have cut the budget deficit further than what Berlusconi and Tremonti have done over the last few years (not to mention Silvio's disastrous management of the budget in 2001-2006).
The day Silvio is chased out of government will be the day the euro-zone's problems are essentially over.

> They cannot agree on who should bear the cost of today’s crisis: should it be creditors (through a write-down), debtors (through austerity) or the Germans (through transfers to the south)?

Strangely enough, back when it wasn't about the economic crisis, but the economic boom, everyone could agree on what to do. And as usual, now everyone is down with a bad case of collective amnesia.

How come everybody turned a blind eye to the fact that Germany, the former "sick man of Europe", has turned into Europe's economic powerhouse without most people in Germany itself seeming to benefit from this fact. Real wages were either stagnant or shrinking.

If you ask wolframalpha.com for "germany export value / gdp" you find that the share of exports in GDP of Germany virtually exploded as soon as the Euro was effectively introduced. It doubled from about 27% in 1998 to about 54% in 2011. Even China, despite extraordinary circumstances and its status as the worlds factory, has a quota just below 40%.

Some questions should have arisen: Where is all the money coming from? Obviously, other countries need to supply a stream of money to pay for those exports from Germany. Unless there is some ferocious economic activity going on in those countries, of which there was little evidence, the money must have either come out of nothing or the exports must have been paid for through credits.

But credits are nothing but a promise. A promise to be able to pay money back later. In order to pay money back, this money must be earned - by providing goods and services to those who want the money back - in one way or another.

But of course, the Germans, as the main culprit, want to have none of that. German economic policy is neo-merchantilistic and exclusively focused on exports - denying its own population at large all the benefits of its economic growth.

There is no credible perspective that will see Germany starting to actually use all the money it earned through its exports to pay for imports or services from the outside - because its economy is now so thoroughly deformed towards exports, that any such move would result in mass unemployment.

But without a credible perspective to earn money by exporting stuff to Germany, all credit contracts with Germany as the creditor are effectively null and void - because they can never be made good, they can only be rolled over and over again to yet another new credit contract.

What do you call a friend who does you a favor, always demands that you do him a favor in return, but whenever there is a chance to actually do him a favor, refuses to accept it? How credible are his demands?

Slowly but surely, the markets caught on to the rotten smell of all this and now we have the result. Of course the other countries have to default on their debt, as there is no chance for them to pay it back.

What is needed now, is a transformation of the European economic structure towards a sustainable system, as otherwise the defaults will just give rise to the next round of credits and the next round of defaults.

(Please note that Germany is not the only cause of the problem, but it plays a prominent enough role to influence economic policy in other European countries and it surely exhibits the problem in its purest form.)

Germany leaving the euro would be ruinous for its export driven economy, since undoubtedly the new deutsche mark would rocket up in value and stifle the amount of goods other nations are able to purchase from Fritz

Maybe the answer is not to abandon the Euro. Just gut it.

Germany, France, and northern Europe could switch to the Euro2. It would begin life at parity with the Euro. They could let Italy, Greece, Spain, Portugal, and Ireland keep the Euro.

This might be politically easier than trying to force Greece out of the Euro.

10 yrs from now, professors of economics will be teaching how 'Chandrashekhar limit' is applied to the 'Keynesian economics'.

There are limits, whether its is the size of stars or size of debt, beyond which a collapse will occur.

From the start, I have believed that Italy would take down the Euro.

"....But the alternative could be the end of the euro. That is the horrible lesson of this week."

And the end of the euro might turn out to be just what Europe needs. If the euro is so immensely difficult to protect, is it really worth saving it at all? Would the alternative - no euro, but national currencies, as before 2000 - really be so catastrophic?

Every time, a country is at risk of default, European policymakers reacted similarly: kick the 'can' down the road.....

Let's face it, the chicken will finally come home to roast sooner or later..... The longer it waits, the more damages it may cause....

We should let them default, Iceland, Greece, Spain, Italy..... and U.S.A. too.....

Why people don't see that????

If this doesn't work I am taking my ural motorbike, a shotgun, plenty of water and headin' for the border... it is thunderdome time.

Euro Bonds and open-ended transfers from Germany et. al

vs.

End of the Euro

T.E. taking the role of the little girl in the fairy tail of the emporor's new cloth...

Why did it take so long?

@Skier1

Southern Britain subsidizes northern Britain. East and west USA subsidizes central USA. Northern Italy subsidizes southern Italy.

Yes, that's true and southern Germany also sends money to the North and the East of Germany. Southern Sweden subsidizes the north. All that is normal because that is with the same nation where people have the same language, culture, mentality, values, norms, etc.

But why on earth should northern Europe pay for the South with whom they do not share the same mentality, language, worh ethics, etc..., and all that just because the South is profligate and likes to retire at age 56?

And you are dead wrong when you say that "they wanted the Euro....". Germans did not want it - they were coerced into accepting it. The only countries that were allowed a referendum on the Euro were the Danes and the Swedes and they voted NO!

Why is Malta falling along with Italy in the picture?

Greetings Forlana,

Well Forlana the euro is a marriage between incompatible partners. It is a mutually abusive relationship not because either of the Partners is inherently blameworthy (although there is a bit of that) but because they are profoundly incompatible. German trade policy and export preference imposes massive costs on her euro partners – it does not impose massive costs on her non euro trading partners. Southern budgetary fecklessness is now imposing massive costs on Germany – it doesn’t impose massive actual and potential costs on non eurozone states.

These countries should not be sharing a currency.

The euro has now demonstrated it’s defects so spectacularly and incontrovertibly that even the most ardent of europhiles now has to openly acknowledge what the sceptics have always been saying – it doesn’t work because it could never work.

But now all the europhile talk is of more integration – the cunning plan is to force these incompatible partners to share their taxes and their debts! After all the shared currency has worked out so well hasn’t it? Nothing will now do but to make perfect the reach and scale of this integrationist disaster. The word has gone out from euro central – “there must be a federal economic government for Europe”.

If only there were eurobonds the europhiles sigh, if only there were federal taxes they murmur, if only the sceptics could be made to shut up and go away they moan – then all would be perfect in our eurodisney universe. Well Europhiles have had their turn in charge Forlana and their idealistic dream has created a generational economic catastrophe for Europe. Enough already!

Your great EU dream violates two eternal human aspirations.

1.) The right to self determination.

2.) The right to government by consent.

It is true that the second aspiration can overrule the first i.e. the right to self determination can be willingly surrendered by an unambiguous majority of the currently constituted national electorates. But unfortunately for the europhiles such democratic consent to the abolition of the nation state is almost certainly not going to be available - anywhere. This is why everybody who so blithely talks about eurobonds and eurotaxes are very careful not to talk about euro referendums.

These people don’t want to increase the legitimacy of the oligarchical EU governance system Forlana – they just want to increase its powers. They are talking about taxation without representation. They are talking about a massive leap backwards into our bloody and pre democratic past.

Here are the two hurdles europhiles confront Forlana:

1.)If Europhiles can’t get democratic consent to the principle of federal governance then they cannot exercise federal powers.

2.)If they do get consent to the principle of Federal governance but they aren’t prepared to replace the existing oligarchical EU structures with a new federal democracy directly accountable to that new federal electorate - then they cannot exercise federal powers.

This is true for their existing powers Forlana but it is even more true for the powers that they are now seeking.

Sceptics are not going to shut up and go away about all of this Forlana– they are going to fight it.

Get over it……

An excellent article from Italy's leading business daily, "IlSole24Ore" with precise indications on how to achieve a balanced budget immediately:

http://www.ilsole24ore.com/art/commenti-e-idee/2011-07-13/heres-balance-...

Every successful Fiat currency union in history has been a transfer union. Every failed currency union was not.

Not even the mighty European Union defy economic gravity, and the choice is now what it always was - either the Eurozone unifies its sovereign risk or the Eurozone breaks up.
Since a breakup would be catastrophic, it is merely a question of which countries Germany is willing to bail out when required (now and for all time) and which of the weaker members are forced out of the currency union.
IMHO Greece out, all others (including Italy) supported by the ECB, either by printing Euros or some form of pan-European sovereign guarantee.

@rwt66

"Germany, France, and northern Europe could switch to the Euro2"

France is economically much closer to Italy and Spain, then to Germany, Finnland, and The Netherlands.

If the later three were to leave the EURO jointly (which I agree, would be the best solution, given the state the mess has reached). However, the new currency won't be called EURO, I guess it will be Krona, Kronen or similar.......

A J Maher, thank you Maher. I read your comments, Maher, with pleasure, Maher :)

I am sorry I don't have much time, but I wanted to answer you. I do hope you will never stop writing about your scepticism in these pages.

However, I have some trouble with accepting part of your critisicm as facts.

>AJM: Southern budgetary fecklessness is now imposing massive costs on Germany/.../
These countries should not be sharing a currency<

Look at this link, if you have time. It is a reprint/translation from the Le Temps.

http://www.presseurop.eu/en/content/article/799871-without-south-north-l...

>AJM: [Euro]doesn’t work because it could never work<

Are you sure euro does not work? Or would it be more precise to say that it works excellently in spite of massive pressure, US-originated crisis, extremely high hot-money transfers risks, fraud of one of the EZ members, etc. etc. etc.?

>[Europhiles'] idealistic dream has created a generational economic catastrophe for Europe<

Where is that generational economic catastrophe taking place? What are the signs of this catastrophe?

> AJM: Sceptics are not going to shut up and go away about all of this Forlana– they are going to fight it.<

I would hate it when the sceptics would shut up. But one point is scepticism and the other is using some argumentation which perhaps applies to the Moon but certainly not to the down to earth reality, like the risk of unwanted merging of the nations etc. This is not scepticism but igniorance, paramount ignorance and a waste of time.

Ok, ladies and gentlemen. Have a great weekend! You too, Junoir :))

@Lucano

Are you sure about this....?

("Germany leaving the euro would be ruinous for its export driven economy, since undoubtedly the new deutsche mark would rocket up in value and stifle the amount of goods other nations are able to purchase from Fritz")

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In the pre-Euro days Germany was also an export driven economy. Those guys just make so fantastic products that the rest of the world will go on buying them, particular since most of those products are not price sensitive. If someone wants a luxury car he will buy a German made car whether it is priced 45.000 or 55.000 euros (or equivalent in D-Marks). The same goes for topclass machinery tools, pharmaceuticals, or any other outstanding products they make. You may buy cheaper products made elserwhere but in the end they may turn out to be more expensive because they don't perform as well or last as long as a German product.

But I do agree that to some extent there would be some effect felt in Germany but they would adjust and probably find a way to raise productivity in order to cope with a new situation.

great, just waiting for the euro to crash :)) and for the yen to rise up, China will be the biggest world economy and will remain in that posture for a very long time