Eurozone marriage breakup would be ‘carnage’, says Martin Wolf

The talk given yesterday at the Institute of International and European Affairs in Dublin by Financial Times commentator Martin Wolf was a sobering enough affair.

Using the idea of a marriage, the veteran economics commentator said that once it was decided, after the emergence of the crisis, that even a partial breakup of the euro zone would involve “carnage”, it was clear that this was a marriage from which there would be no exit.

This, he said, has enormous consequences. Because the crisis has been interpreted as a fiscal rather than a financial crisis, the creditor countries within the monetary union had their view that it had nothing to do with them reinforced.

This in turn led to the evolution of the series of economic surveillance programmes now being implemented by the European Commission, and a state of affairs that Wolf calls the Discipline Union. Having bureaucrats telling governments what to do is “absolutely intolerable”, he said.

His programme for making the marriage tolerable is to increase the level of political integration and mutual support within the currency zone.

During the currency’s honeymoon period, when countries such as Ireland, Spain and Italy had bond yields very similar to those of Germany, said Wolf, he used to wonder what had ever happened to risk.

He appeared sceptical about the low level of risk being factored into Irish and other peripheral country bond yields these days, saying he believed the market’s view was “seriously overly optimistic”. It was not difficult to imagine the type of situation that would lead to another crisis, which would quickly, he felt, turn into another systemic crisis.

“We are living through what will happen next,” he said at one stage.

It looks like we will be for some time to come.