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There is now a real danger that the euro crisis could destroy the European Union

My purpose in coming here today to discuss the crisis of the euro. In light of recent events, I think you will all agree that the crisis is far from resolved. Already caused considerable damage, both financially and politically, given that many victims too. The crisis has also transformed the EU into something radically different from what was originally planned. The EU was supposed to be a voluntary association of equal states, but the crisis has become a nest with Germany and other creditors over and heavily indebted countries relegated to second-class status. Although, in theory, Germany can not dictate policy in practice no policy can be proposed without the permission of Germany first. To make matters worse, austerity has led Germany to prolong the crisis and the perpetuation of the subordination of the debtor countries.

This has created political tensions, as evidenced by the political stalemate in Italy. Italy now has a majority against the euro and the trend is likely to increase. At present there is a real danger that the euro crisis could destroy the European Union. A messy breakup leave Europe worse than it was when you started the bold experiment of creating a European Union. It would be a tragedy of historic proportions. But it can be avoided only in Germany, under the direction of Germany. Germany did not intend to occupy a dominant position and was reluctant to accept the responsibilities and obligations that come with it. This is one reason why the current situation has arisen. But like it or not, Germany is in the driver's seat and that's what brings me here.

Europe

How to get in a mess? And how can you escape? These are the two questions I would like to address. The answer to the first question is very complicated because of the euro crisis is extremely complex. It has both a political and a financial component. And the financial aspect can be divided into at least three components. A crisis of sovereign debt and banking crisis and divergences in competitiveness Different aspects are interconnected, so that the complex problems that boggle the mind. In my opinion, the euro crisis can not be understood properly without realizing the crucial role that mistakes and misunderstandings played in its creation. The crisis is almost entirely self-inflicted. It has the quality of a nightmare.

Instead, the answer to the second question is very simple. Once we have acquired sufficient knowledge of the problems of practical solution suggests itself.

I will argue that Germany has a major responsibility for policy mistakes that created the crisis. But I want to say in advance that I do not blame Germany. Who was in charge have made similar mistakes. What I can say from personal experience that no one could understand the situation in all its complexity when it is developed.

I realize that I might upset to put the burden on Germany. But only Germany can fix things. I'm a big believer in the European Union and I do not want to see it destroyed. I care about the huge and unnecessary human suffering that the euro crisis is behind and I want to do what I can to alleviate it. My interpretation of the euro crisis is very different from the prevailing view in Germany. I hope that gives you a different perspective, you might have to reconsider their position before they do more damage. This is my purpose in coming here.

The European Union is a bold project that has captured the imagination of many people, including mine. I considered the European Union as the embodiment of an open society - a voluntary association of equal states ceded part of their sovereignty for the common good. The EU Member States had five large and several small and one of them with the principles of democracy, individual freedom, human rights and the rule of law. No nation or nationality were dominant.

The integration process was conducted by a small group of visionary men of state who recognized that perfection is unattainable and practiced what Karl Popper called piecemeal social engineering. They set limited and firm targets and timelines then mobilized the political will of a small step forward, knowing full well that when they are successful, their failure to appear and require a little further. The process fed on its own success, very similar to a sequence of rise and fall of financial markets. Thus the coal and steel was gradually transformed into the European Union, step by step.

France and Germany used to be at the forefront of the effort. When the Soviet empire began to disintegrate, the leaders of Germany, realized that reunification was possible only in the context of a united Europe and they were willing to make considerable sacrifices in order to achieve. When it came to trading, they were willing to contribute a little more and have a little less than the other, which facilitates an agreement. At that time, German government used to say that Germany does not have an independent foreign policy, only a European. This has led to a dramatic acceleration of the process. A led to the reunification of Germany in 1990 and the Treaty of Maastricht in 1992. It was followed by a period of consolidation, which lasted until the financial crisis of 2007-8.

Unfortunately, the Maastricht Treaty was fundamentally flawed. The architects of the euro have recognized the incomplete building: a monetary union without political union. However, the architects had reason to believe that when the need arose, the political will to take the next step could be mobilized. After all, this is how the process of integration had previously worked.

But the euro has had many other faults, which neither the architects nor the Member States are fully aware. For example, the Maastricht Treaty was assumed that only the public sector can produce chronic deficits because the private sector is still correct their own excesses. The financial crisis of 2007-8 proved that wrong. The financial crisis has also revealed a fatal flaw in the building near the euro by creating an independent central bank, the member countries have become debt in a currency that is not controlled. This exposes them to the risk of default.

Developed countries have no reason to default, they can always print money. Your currency depreciation, but the risk of default is virtually nonexistent. In contrast, the least developed countries that have to borrow in foreign currency, are at risk of default. To make matters worse, the financial markets may actually lead the country into default by bear raids. The risk of default relegated some members of the status of a third world country that has become surplus foreign currency debt.

Before the financial crisis of 2007-8 both the authorities and financial markets ignored this aspect of the euro. When the euro was introduced, government bonds were treated as risk free. Regulators have allowed commercial banks to buy unlimited amounts of government bonds without leaving equity, and the European Central Bank agreed to all government bonds in its discount window on an equal footing . This creates a perverse incentive for commercial banks to accumulate the bonds of weaker members who pay higher fees in order to earn a few extra basis points. As a result, the interest rate differentials between the different rates on government bonds has virtually disappeared.

The convergence of interest rates has led to a divergence in economic performance. The so-called peripheral countries, Spain and Ireland first of them, enjoyed real estate, investment and consumption growth which made them less competitive, while Germany, burdened by the cost of reunification, which participate in the labor market in large range and other structural reforms that have made it more competitive.

In the weeks that followed the bankruptcy of Lehman Brothers, global financial markets literally stopped working and had to be put on artificial life. This requires replacing the sovereign debt (in the form of guarantees by the central bank and fiscal deficits) for the credit of financial institutions whose status has been affected. The emphasis on the sovereign credit revealed the hitherto neglected feature of the euro, that is, the creation of an independent central bank of the Member States of the euro has signed away a part of their sovereign state.

It was time to take the next step towards a fiscal and monetary union, the lack of political will. Germany, burdened by the costs of reunification was no longer at the forefront of integration. Angela Merkel correctly read the public opinion when he said that each country must take care of their own financial institutions rather than the European Union exercised collectively. It was a step back. In retrospect, it was the beginning of a process of disintegration.

financial markets took over a year to realize the implications of the statement of Chancellor Merkel, which shows that they also work with knowledge far from perfect. Only at the end of 2009, when it was revealed the extent of the Greek deficit, financial markets do not realize that a member could actually default. But then the markets pose risk premiums weaker countries with a vengeance. This has made commercial banks whose balance sheets have been responsible for these potentially insolvent bonds and created both the sovereign debt and banking crisis. The two are linked together like Siamese twins.

There is a close parallel between the euro crisis and the international banking crisis of 1982. Then, the international banking system and IMF authorities rescued the international banking system, giving just enough money to heavily indebted countries so they can avoid a default, but at the cost of pushing them into a lasting depression. Latin America experienced a lost decade.

Today Germany plays the same role that the IMF did then. The setting is different, but the effect is the same. The creditors urge all the burden of adjustment on debtor countries and avoid their own responsibility for the imbalances. Interestingly, the terms "center" and "periphery" have crept in almost unnoticed use, but in political terms is clearly insufficient to describe Italy and Spain and the periphery of the European Union. In fact, however, the euro had given bond debt in third world countries who bear the risk of default. This was ignored by the authorities and still not recognized properly. In retrospect, this was the primary cause of the euro crisis.

As in the 1980s, all the blame and the burden fell on the "periphery" and the responsibility of the "center" has never been properly recognized. The peripheral countries are criticized for their lack of fiscal discipline and work ethic, but not more than that. It is true that the peripheral countries must make structural reforms, as did Germany after reunification. But to deny that the euro itself has structural problems that need to be corrected, is to ignore the root cause of the euro crisis. Yet this is what happens.

In this context, the German word "Schuld" plays a key role. As you know, it means both the debt liability or guilt. This made or natural "selbstverst?ndlich" for the German public to blame the heavily indebted countries of their misfortune. The fact that Greece flagrantly violated the rules supported this attitude. However, other countries such as Spain and Ireland have followed the rules and in fact Spain was celebrated as a paragon of virtue. Obviously they are systemic failures and misfortunes of heavily indebted countries are caused largely by the rules governing the euro. This is the point I want to go home today.

In my opinion, "Schuld" or the responsibility of the "center" is even greater than it was during the banking crisis of 1982. It may be politically acceptable in 1982 to impose austerity in less developed countries to save the international financial system, but the same thing within the euro zone today can not be reconciled with the Union EU as a voluntary association equal states. There is an unresolved conflict between what is dictated by financial necessity and what is politically acceptable. This is the starting point of the last Italian elections should have taken home.

The weight of the responsibility lies mainly in Germany. The Bundesbank helped design the euro project for defects that put Germany in the driver's seat. This created two problems. One is political, the other financial. It is the combination of the two that made the situation so difficult to solve.

The political problem is that Germany did not seek dominance has been released and is ready to accept the obligations and responsibilities that go with it. Germany does not want to understand the "deep pocket" for the euro. Therefore, support extend far enough to avoid a default, but nothing more, and as soon as the pressure decreases seeks financial markets tightened the conditions for granting the aid.

The financial problem is that Germany imposes bad policies in the euro area. Austerity does not work. You can not reduce the debt burden by reducing the budget deficit. The debt burden is the ratio of accumulated debt and GDP, both in nominal terms and in terms of lack of demand, budget cuts lead to a disproportionate reduction in GDP -. In technical terms, the so-called fiscal multiplier is greater than one.

The German public find it difficult to understand. Fiscal and structural reforms undertaken by the Schroeder government worked in 2006, why not go to work for the euro area a few years later? The answer is that austerity works by increasing exports and reducing imports. When everyone does the same thing just does not work.

euro crisis peaked last summer. Financial markets began to anticipate a possible break and risk premiums have reached unsustainable levels. As a last resort, Chancellor Merkel has supported the European Central Bank president, Mario Draghi, against their own candidate, Jens Weidmann. Draghi rose to the occasion. He said the ECB would do "whatever it takes" to protect the euro and backed up with the introduction of the so-called open market operations. Financial markets calmed down and embarked on a powerful relief rally. But the jubilation was premature. Once the pressure of financial markets has declined, Germany began to gradually reduce the promises he had made at the height of the crisis.

Rescue

In Cyprus, Germany has gone too far. To minimize the cost of the rescue insisted on saving bank depositors. It was premature. If it happened after the establishment of a banking union and banks recapitalized, could be a healthy development. However, it came at a time when the banking system was abolished in national silos and remains highly vulnerable. What happened in Cyprus undermined the business model of European banks, which relies heavily on deposits. So far, the authorities have done everything possible to protect depositors. Cyprus has changed that. The focus is on the impact of the rescue of Cyprus, but the impact on the banking system is much more important. Banks will pay risk premiums will fall more on the weakest banks and banks in weaker countries. It will reinforce the insidious link between the cost of sovereign debt and bank debt. The playing field will be even more unequal than before.

Chancellor Merkel wanted to put the euro crisis on the ice at least until after the election, but it is back in full force. The German public may not be aware that Cyprus was a huge political victory for Chancellor Merkel. No country would dare to defy his will. In addition, Germany itself remains relatively unaffected by the deep depression that has gripped the eurozone. I hope, however, that at the time of elections in Germany will also be in recession. This is because the monetary policy of the euro area is not synchronized with the other major currencies. Others are engaged in quantitative easing. The Bank of Japan has been the last bastion, but recently changed sides. A weaker yen, with weakness in Europe is bound to affect German exports.

Eurobonds are the joint and several of the Member States obligations. If allowed to countries that are governed by the fiscal pact to convert its entire stock of public debt bonds, the positive impact would be nothing less than miraculous. The risk of default would disappear and would therefore risk premiums. Banks' balance sheets would receive immediate boost and could therefore budgets of heavily indebted countries, and it would be cheaper to maintain the stock of public debt. Italy, for example, could save up to 4% of GDP. Your budget should be in surplus and instead of austerity, the government could implement fiscal stimulus measures. The economy would grow and the debt ratio was reduced. Most seemingly intractable problems disappear into the air. Only differences in competitiveness are not resolved. Countries should follow the structural reforms, but the main structural defect euro would be healed. It is really like waking from a nightmare.

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