Earlier this year as the euro trounced the dollar on the exchange markets, it occurred to me that holding euros was much, much more tenuous than holding dollars as it was not the currency of a single sovereign nation. Clearly the Fed has every intention of propping up the dollar, but can the same be said of Germany, France, England or Italy when it comes to their common currency? Highly unlikely, as prescient Telegraph reporter Ambrose Evans-Pritchard writes:
"Who in the eurozone can do what Alistair Darling has just done in extremis to save Britain's banks, as this $10 trillion house of cards falls down? There is no EU treasury or debt union to back up the single currency. The ECB is not allowed to launch bail-outs by EU law. Each country must save its own skin, yet none has full control of the policy instruments.
Germany has vetoed French and Italian ideas for an EU lifeboat fund. The former knows exactly where that leads. It is a Trojan horse that will be used one day to co-opt German taxpayers into rescues for less Teutonic EMU kin. One can sympathise with Berlin. But sharing debts with Italy and Spain was implicit when they agreed to launch the euro. A shared currency entails obligations. We have reached the watershed moment when Germany has to decide whether to put its full sovereign weight behind the EMU project or reveal that it is not prepared to do so in a crisis.
This is a very dangerous set of circumstances for monetary union. Will we still have a 15-member euro by Christmas?
Think that's scary? Try these tidbits, from Nouriel Roubini's weekly round-up newsletter of September 26th, 2008:
• Daniel Gros, Stefano Micossi: The 'overall leverage ratio' — a measure of total assets to shareholder equity — of the average European bank is 35 due to large in-house investment banking operations, compared with less than 20 for the largest U.S. banks. This means that relatively small writedowns on their assets could have a devastating impact on a their capital –> some EU banks have become too big for any one European country to save while an official cross-border crisis management mechanism with ex ante burden sharing is not in place
• The crucial problem on this side of the Atlantic is that the largest European banks have become not only too big to fail, but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50) amount to about €2,000bn (more than Fannie Mae) or more than 80% of Germany's GDP. This is simply too much for the Bundesbank or even the German state
(Richard Metzger is a guestblogger)