Happy times!
The only way out is for the European Central Bank to lift Club Med off the deflation reefs by monetary stimulus, and allow these economies to work off their debt in an orderly fashion without shrinking nominal GDP. That means quantitative easing a l’outrance - not "sterilising" bond purchases it has done so far - and that in turn means that Germany must accept 5pc inflation.
Will Germans tolerate such an outcome? The civil peace of Europe demands that they do, but I am not hopeful. The Bundestag vote to authorise Germany’s €147bn share of the EMU "shield" has already caused apoplexy. "One of the gravest errors of decision in the history of the Federal Republic of Germany," said Hans Werner Sinn, head of the IFO Institute.
Bavarian politician Peter Gauweiler is launching a legal challenge at Germany’s constitutional court to block the rescue, arguing that the "contractual foundations of monetary policy" as fixed by the Maastricht Treaty have been breached. The legal cases are piling up. It is remarkable that so much time has been spent by City analysts combing through Greek data to gauge the risk of default, yet so little time has been spent thinking about these cases at Karlsruhe. How many have read the court’s rulings on Maastricht and Lisbon? Yet the "tail-risk" is nuclear.
The North-South divide within EMU has been allowed to go so far that any solution must now be offensive to either side, and therefore will be resisted. The euro is becoming an engine of intra-European tribal hatred. Brilliant work, Monsieur Delors.
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