What euro crisis?

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It would be premature to sound the euro's death toll over market reactions to the Greek bailout, argues Hans-Werner Sinn, professor of economics and public finance at the University of Munich and president of the Ifo Institute, in an op-ed. 

The following contribution was authored by Hans-Werner Sinn, professor of economics and public finance at the University of Munich and president of the Ifo Institute. 

"Despite huge rescue packages, interest-rate spreads in Europe refuse to budge. Markets have not yet found their equilibrium, and the governments on Europe’s southwestern rim are nervously watching how events unfold. What is going on?

The rescue packages were put together on the weekend of May 8-9 in Brussels. In addition to the €80 billion program already agreed for Greece, the European Union countries agreed on a €500 billion credit line for other distressed countries. The International Monetary Fund added a further €280 billion.

The driving force behind all this was French President Nicolas Sarkozy, who colluded with the heads of Europe’s southern countries. French banks, which were overly exposed to southern European government bonds, were key beneficiaries of the rescue packages.  

Since rescue measures beyond the pre-arranged Greek package had not been on the agenda for the Brussels meeting, German Chancellor Angela Merkel thought she could safely go to Moscow to commemorate the end of World War II – unlike Sarkozy, who declined Russian Prime Minister Vladimir Putin’s invitation. Worse, the leader of the German delegation to the EU meeting fell ill and was taken to hospital upon arrival in Brussels. This left the German delegation headless.

Proclaiming a systemic crisis of the euro, Sarkozy seized the opportunity and took Germany by surprise. He asked for huge sums of money and, as Spanish Prime Minister José Luis Zapatero reported, threatened to pull France out of the euro and break up the Franco-German axis unless Germany opened its purse. After just two days of negotiations, the Maastricht Treaty’s no-bailout clause, which Germany once had made a condition for giving up the Deutsche Mark, was defunct. The “Club Med,” as Germans call the southern countries, had taken over Europe.

Even the European Central Bank chipped in, buying government bonds of over-indebted countries, using a loophole in the Maastricht Treaty and overruling the Bank’s German representatives. The European house creaked mightily. Germany’s president stepped down soon after the decisions – some say because of them. Germany’s political elite are in an uproar, and serious voices advocate splitting the eurozone into northern and southern tiers, with France relegated to the latter."

To read the op-head in full, please click here.

(Published in partnership with Project Syndicate.)

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