France, Germany have "Intense Consultations" on Smaller Eurozone; Breakup Inevitable, but How?

Realization the Eurozone is no longer tenable is at long last at hand. In fact, "intense discussions" have been underway for months but are just now admitted to by senior EU officials.

Bloomberg reports U.S. Stocks Extend Declines on Concern Nations May Exit Euro

U.S. stocks extended declines following a report that German Chancellor Angela Merkel’s party wants to make it possible for European nations to exit the euro area.

Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.

A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper said.

France and Germany have "Intense Consultations" on Smaller Eurozone

Please consider French and Germans explore idea of smaller euro zone

"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part," the official said.

The change has been discussed on an "intellectual" level but had not moved to operational or technical discussions, the EU official said.

A French finance ministry spokesman denied there was any project in the works to reduce the currency bloc's membership.

"There have been no conversations between French and German authorities at any level on decreasing the size of the euro zone," the spokesman said .

A radical overhaul of the European Union would be opposed by many members.

"This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years," one EU diplomat told Reuters."This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it."

Never Believe Anything Until It's Officially Denied

We now have an official denial from France that breakup conversations are taking place. This contradicts an admission by others that such discussion are taking place.

According to the 1980's British sitcom Yes Minister, "The first rule of politics,” Sir Humphrey, the wily civil servant in the show, insists is: “never believe anything until it is officially denied.”

Eurozone Breakup Inevitable, But How?

The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.

The German supreme court has ruled out a fiscal union and printing unless German voters approve (and they won't). Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

The Italian bond market revolt (see Yield Blowout, Bond Market Emphatically Rejects Italy's Solution; No Place to Hide) and the collapse of Greece says the breakup is sooner rather than later. However, politicians have a propensity to kick the can down the road longer than anyone thinks possible.

The key question now is how?

It would be best for all involved if Germany left the Eurozone and went back to the Deutschmark. Germany would have an immediately credible currency. Should Greece or Spain leave first, those countries might experience hyperinflation or massive inflation.

Breakup Scenarios and Logistics of Denial

For further details discussion of various breakup scenarios as well as a discussion on the "Logistics of Denial", please see my September 16 article Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)

It's important to remember that Germany suffers regardless. As long as the Eurozone stays intact (it can't and won't over the long haul) German taxpayers have to keep acting bailing out foreign countries, foreign banks, and their own banks.

On the other hand, were Germany to leave, the debts to German banks will not be paid back in Deutschmarks but rather deflated Euros.

On the whole, Germany exiting the Eurozone would be less disruptive, than massive inflation scenarios in Greece, Portugal, and Spain.

If France wants to stay in the Euro, let them. They can have the ECB as well. Then the ECB will print money to bail out the French banks (just as French president Sarkozy wants).

Sarkozy may not want a collapse of the Euro, but it would happen. The message here is simple: If you are in Euros, get the hell out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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