Austrian and German Foreign Ministers back explicit euro expulsion mechanisms

Last year I predicted that the route that Europe would go would be fiscal integration coupled with explicit mechanisms for allowing an exit from the euro zone. For example, in November during the Italian crisis I wrote:

I continue to predict that the move will be toward temporary ECB intervention followed by tighter fiscal integration and explicit mechanisms for euro zone exit. Sources indicate that Germany may already be preparing for a Greek exit from the eurozone. Now we learn that the Germans may also be pushing for euro area fiscal integration and oversight as well.

It’s been almost a year since I wrote this. So we have a lot better understanding about what European policy makers intend to do. And most of what I wrote in that post has come to pass, from the move toward a super stability and growth pact kind of fiscal integration to ECB intervention in sovereign bond markets. But the spectre of redenomination risk has actually been a major hurdle in this European crisis. So much so that ECB board member Joerg Asmussen has explicitly pointed to eliminating convertibility risk as the rationale for the ECB’s next bond market intervention. Nonetheless, the movement to integrate explicit exit mechanisms into the European monetary union has begun.

Both, Austrian daily Der Standard and German financial daily Handelsblatt are reporting on German Foreign Minister Guido Westerwelle and Austrian Foreign Minister Michael Spindelegger calling for exactly this kind of mechanism. Here is my translation of the Handelsblatt version:

According to sources, German Foreign Minister Guido Westerwelle (FDP) supports his Austrian counterpart’s proposal to create future mechanisms for expulsion of individual countries from the euro zone. He got Westerwelle’s backing for the idea, Austrian Foreign Minister Michael Spindelegger told the Austrian news agency APA on Wednesday. Westerwelle’s spokesman said when asked, the enforcement of common rules must be handled consistently in the future.

Spindelegger referred APA to the recent proposal submitted by him that, instead of the current sanctions-only approach, “expulsion of a member of the euro zone” also be considered. “Anyone who does not abide by the common rules, has lost nothing from the community,” he said.

Westerwelle had signaled on the same day at a meeting of foreign ministers of the German states in Liechtenstein support for this approach. This would not be applicable to the current debt problems of Greece, but to future arrangements for the euro zone.

So there it is, the Super SGP with expulsion as the ultimate penalty for free riders just as I was saying last year. This is where Germany and Austria want things to go. I imagine Angela Merkel sees the intervention to support Spain and Italy as a temporary crisis maneuver. But once crisis is over, the super SGP will become the law of the land in German minds. And that may well include expulsion mechanisms so that countries that can’t make the grade do not “infect” others with their redenomination risk contagion. That’s the thinking. I can’t say I agree with it necessarily, but I think it does have a certain logic to it.

Source: Der Standard, Handelsblatt

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