It has been Germany's position that every country has to deal with its own problems from the onset of the euro crisis. Reluctantly, Merkel was forced to give in to first a bailout of Greece, followed by Ireland and Portugal, the EFSF and the ESM and now to the rescue of Cyprus. But instead of actually helping the countries in need, every one that has received a bailout is stuck in recession, with no hope of recovery since the austerity measures which had to be enacted, have caused significant additional damage to the economies. What is more, the austerity measures have also caused the debt to GDP levels to rise. The fiscal multipliers were larger than one.
In a sane world we would recognize our mistake and change course or at least reduce the extend of "fiscal consolidation". Instead the Euro-Titanic has accelerated and is heading steady towards its own demise. The Cyprus rescue has in fact basically forced the island out of the euro area. Yes, it still has the euro, but capital controls which had to be enacted to buy the banks some time have made a mockery of the principle of a common currency area. Shortly after the situation in the island was resolved for now, the Portuguese Constitutional Court declared some of the austerity measures unconstitutional. Instead of using this opportunity to reduce the damage caused, the European Commission outright threatened the countries government:
At the same time, it is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal, which would facilitate Portugal's return to the financial markets and the attainment of the programme's objectives.While also mentioning the very much disproven myth that austerity leads to growth:
One of the other major players in the euro crisis in my opinion the most important one the German government went a step further, with Schäuble saying:
Continued and determined implementation of the programme offers the best way to restore sustainable economic growth and to improve employment opportunities in Portugal.
"Nobody in Europe sees this contradiction between fiscal policy consolidation and growth,” Schauble said. “We have a growth-friendly process of consolidation, and we have sustainable growth, however you want to word it."Well, I guess said contradiction is so blatantly obvious, that even I see it. Some call it a recession: E.g. the IMF and the European Commission but that's just wording. In truth everything is double-plus-good especially in Germany. For example new orders:
Also Germany isn't in recession, yet. The growth-enhancing austerity is working, and every one claiming otherwise should get his wording straight.
Now this week Soros commented that Germany should either leave the euro or allow eurobonds. He also stressed the need for an actual banking union. Well, I think the most likely scenario is his worst case:
By contrast, if Italy left, its euro-denominated debt burden would become unsustainable and it would have to be restructured. This would plunge the rest of Europe and the rest of the world into an uncontrollable financial meltdown. The collapse of the Euro would likely lead to the disorderly disintegration of the European Union and Europe would be left worse off than it had been when it embarked on the noble experiment of creating a European Union.