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By Fiona Mullen, Director Sapienta Economics
As some of you might have heard me say on air this week, I have a nasty feeling that the eurozone elites took an unconscious decision in the early hours of Saturday morning to cut the umbilical cord with southern and peripheral Europe and thereby lay the ground for a break-up, not only the eurozone but of the European Union itself.
If they did do this, albeit subconsciously, then they did it for perfectly sound political reasons. Their voters are tired of subsidising euro peripherals whom they perceive to be less disciplined and more corrupt than they are.
Read the local populist press in these countries and you know what I mean. The German popular press’s attitude towards Mediterraneans is about as multicultural as the British popular press’s attitude towards Germans.
And the Greek press (perhaps soon to be the Cypriot press) on Germany is even worse.
To put a pessimist’s spin on it, the realisation of Saturday morning was that the Europeans detest each other just as much as they did in the hundred years’ war.
North European voters might like sunning it up in the Mediterranean but they have never stopped thinking of these swarthy types as a bunch of dirty grafters.
Likewise, Mediterraneans have never stopped thinking of north Europeans as a bunch of unsmiling killjoys who never make up in tourist volumes for the little they spend when they are there on holiday.
Better to admit the truth and create a smaller club of like-minded types.
How would it happen?
I calculate that the deposit haircut saved the German taxpayer less than a day of annual German budget revenue.
So when Spain gets into trouble, which it has a much higher risk of doing now than it did before, it will need a lot more than the miniscule EUR 5.8 bln raised by Cyprus from this measure.
The same goes for vulnerable Italy and increasingly vulnerable France.
But the clear message sent on Saturday morning was that the north European taxpayer will not foot the whole bill to support the Union. Targeting bondholders will doubtless not raise enough, so a large part of the hit will have to be taken at home in the form of bank deposits.
Southern European politicians will calculate that the combination of Spanish/Greek unemployment and the “robbery” of deposits will never get through their parliaments. The money will not come from northern Europe either, so they will have to exit the euro. Once Spain goes, many will follow.
The new northern group
What might the new Europe look like? In the north, we would have a small, tight group dominated by Germany.
The first rule will be that this group can only comprise countries that will never be a burden on the German taxpayer. That means it would consist of five well behaved northerners: Germany, Benelux and Austria.
If Finland (for which, read Nokia) can cope with its currency soaring against the other Nordics and US/Japanese rivals, it might just be allowed to stay in, partly as a reward for consistently backing harsh deals against those pesky southerners.
You could call them the North European Union (NEU). As all countries in this group would have at least one Germanic national or official language (Flemish for Belgium, Swedish for Finland), they might even adopt German as their lingua franca. Then we could call them Die NEUen.
They would keep the euro, which would soar in value, and make their own journey to full political and economic union.
Italy, a founding member of the original club of six, will be out, as would France. It is too big, too “southern” and too fiscally profligate for this tight-knit club.
So what would the outsiders do?
The EU outsiders will have left the eurozone long before Die Neuen formalises the relationship that they might have started to cement last Saturday.
Since Britain and France would never agree on who would dominate the remaining 22 countries (or 23 with Croatia), the remainder would split between a coalition of the willing (they certainly won’t call it a union) centred on the UK.
This might comprise the new NATO countries in the east and potentially also Turkey. We might call it the Coalition of Friendly European Nation States (C-FENS).
The Mediterraneans would cluster around a newly resurgent France. The Southern European Alliance, which would be known by its French acronym, AES (pronounced “ace”).
War or peace?
The big question is whether this new Europe would be peaceful, or whether it would fall into war.
Here we have to remember that the past 60 years of relative economic stability have been, to use a fashionable eurozone term, “unique and exceptional”, helped a great deal by favourable demographics, a low starting base for incomes and technological change.
So, an awful lot will depend on what happens to the economies that exit the euro.
If it means a resurgence of post-devaluation growth and jobs combined with fiscal discipline, then the instinct will be to sign trade deals, just like the European Coal and Steel Community of 1951.
Countries might cooperate peacefully on a distant but friendly, “good walls make good neighbours” basis.
If it means mass devaluation and inflation, then the instinct for trade wars, leading to real wars, will be strong. The old soil of Europe will again be steeped in blood.
If you find this vision shocking, perhaps it is because I have had the equivalent of only one night’s sleep in 72 hours, so that I can answer the world media’s questions about that funny little place called Cyprus.
I hope my vision does not materialise.
But in June 2010, ignorant that the banks had already invested in Greek government bonds, I hoped I was wrong when I drafted a book chapter saying that Cyprus might go the way of the PIIGS. By the time it was published, it was already happening.
In mid- 2012 I was drafting another report saying that Israel and Turkey might start talking about Israel sending gas to Turkey. By the time the report was published a few weeks ago, that was already happening too.
This one might take a bit longer for my predictions to unfold. But as that rare thing called a pro-European Brit, I really do hope that I am wrong this time.
