Germany Is Smart to Plan for Death of Euro

It's generally a Good Thing for the people in the Eurozone that their governments can't impoverish them by printing money.

I’ll take that bet.

  Ireland:        4,450,446 (51,049)
  Massachusetts:  6,593,587 (49,875)
  Germany:       81,879,976 (40,873)
  UK:            61,838,154 (35,165)
  Greece:        11,283,293 (29,240)

Bailout is EUR 85bn which comes out to about 25,233 USD per capita.

This may be true of the average US citizen. Probably much less true of readers of thestreet.com or any US publication about economics. And certainly not true of folks reading economic publications in the UK, who are well aware of the relative sizes of Ireland and Germany.

Spain, on the other hand, has fifty million people, and is being talked about as possibly the next domino to fall. If that happens, it's much more serious than Greece or Ireland.

PS. Ireland and Massachusetts are roughly the same size; I think anyone can be forgiven for not knowing which is larger.

Not the whole economy of Ireland is affected. It is just parts - banks, real estate, etc.. The companies are still there and their products and services are still valuable. When the EU keeps the banks from collapsing, makes credit available, then Ireland is still alive.

To keep a tiny country like Ireland with 6 million people running should not be difficult for an EU of 500+ million people.

The German General Staff had and has contingency plans for everything. The General Staff was Prussia's / Germany's secret weapon for two centuries, until it was copied by other nations.

But that's just the German army, I don't know about the civilians.

"Many of the benefits of European integration came from the harmonization of regulations and the steps that were taken to facilitate cross border movement of goods, services and people. My work [...] shows that there is little or no impact when the euro is introduced."

He explicitly says that the Euro does not contribute to removing the barrier. He's saying that the fact that countries with trade deficits have pressure to devalue their currencies contributes to a country like Germany with a trade surplus not revaluing its currency when it might otherwise have done so.

Edit:

Quote from the abstract of his paper:

"The Euro adoption as well as the anticipation of the Euro adoption has minimal effects on market integration."

The paper goes into more detail and is freely downloadable. In particular he says that there is a small effect from the Euro introduction in his regression model, but that it is much less significant than EU membership in explaining correlation between valuations of similar companies in different countries. The "anticipation of the Euro adoption" is intended to counter the possibility that integration due to preparation for Euro adoption might harmonise the valuation figures prior to actual adoption.

I'm a bit suspicious of the arguments he lays out for the lack of a Euro effect on integration of economies within the EU, especially in the light of his article. The paper claims:

"In addition, ex ante we would expect the process of economic market integration to be more important for equity valuations than the adoption of a single currency. This is because currency movements account for only a small part of the total variation in equity returns and the variability of intra-Europe exchange rate changes before 1999 was quite limited."

So here he's arguing that Europe exchange rates before the Euro didn't change significantly relative to each other, and using this to argue that other factors are more important for market integration than the currency. If that's the case you might then expect that getting rid of the Euro would equally have very little effect. It seems he wants to have it both ways: the introduction of the Euro has little effect on market integration, but getting rid of it would decrease harmful effects of market integration.

In general he tries hard to tease out the correlation versus causation in integration effects due to introduction of the Euro, but some of his arguments seem a little arbitrary, for example, the Euro affect that he observes is statistically explained away by introducing a "distance from Brussels" control and a "foreign language spoken" control. I could well be misunderstanding, but I think the significance of these controls needs more explaining to make his case convincing. This is the point where a lot of free time and access to the secondary literature would become helpful...

I think you're right about Ireland. There's also a lot more in common culturally with Ireland than with Portugal, and while Anglo-Irish history is a tricky subject, I would imagine people would take the concept of helping Ireland more seriously than Portugal.

Your point about fragmentation is quite interesting to me. Perhaps if Portugal and Spain were 'encouraged to leave' by the EU that might be a politically bitter pill to swallow, but perhaps a financially acceptable solution. After all, a large part of the Eurozone no longer meets the Copenhagen criteria. Unfortunately neither the EC or EU Parliament seem to have any grounding in reality or rational thought.

Within the euro, the link is even stronger. Before the Euro, there was an agreement to keep exchange rates more or less fixed, but the fixed rates would get adjusted when they grew too unrealistic. When that happened, the Italian lire, Greek drachme, Spanish peseta, etc. would get devalued, making German products more expensive for people in Italy, Spain, Greece, etc. That mechanism is gone now.