Ten days ago, Sean Kay, a political science professor at Ohio Wesleyan University and author of Celtic Revival? The Rise, Fall, and Renewal of Global Ireland, sent me the note below outlining Germany's options now after having failed to take the steps that might have put it in front of Europe's growing economic crisis:
One thing that is crucial to keep in mind is that the peripherals -- Ireland, Portugal and Greece -- may likely not even be worth in terms of assets the actual value that Germany and the rest of Europe and the IMF is bailing them out at, particularly if deepening recession stunts any prospects of economic growth.
Crucially, the argument for the Irish bailout (and Portugal and the first Greek tranche) was containment to stop contagion. But that was the "theory" behind it. Aggressively get Ireland early into that fold to stop the bleeding, especially to shore up German and other major bank exposure at the time.
Here's the key: that approach has clearly failed. Key to the Germans, It was not in to help those peripherals - but it instead wanted to use them to send the strongest possible messages to Italy (and Spain) about budget reform and austerity - and in both cases that has clearly failed as we are seeing the contagion nightmare unfold. What is amazing to me is that scenarios just a few week ago unthinkable now seem very possible.
1) Spin out the three peripherals - out of the Eurozone - gone, let them go, default, twist in the wind, whatever you call it - but dump them and see the capital in those states flee back to Germany as a safe haven. Use what is left as the key to leverage up Italy and protect French exposure. Then it becomes doable in the smaller Eurozone to include Italy and lets Spain make its own really hard choices and fast.
2) Spend a decade transferring North European capital to southern Europe. Not too likely - but that is what it means to "save the Eurozone" at this point.
3) Spend a decade driving down North European wages to match those in southern Europe to balance out the Eurozone wealth. Also can't see the German voters going for that.
4) Germany itself bolts the Eurozone - and then rebuilds a much smaller one around like-minded Northern neighbors, plus Italy if it can be saved.
Of course there is also the hope that it can be muddled through - but we are watching a slow motion replay of the 10 year bonds from what we saw a year ago in Ireland, and with the size of these economies and major global exposure, trying to patchwork this together - while hopefully will work, seems less and less realistic.
Kay's framework draws in part from analysis offered in July this year (pdf of "Europe on the Brink") by Peter Boone and former IMF Chief Economist Simon Johnson who have published a sobering assessment that concludes that the "Euro Area is Coming to an End."
The opener which makes clear the price Germany is now paying for not having acted more boldly sooner:
Investors sent Europe's politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.
The reality, though, is that there are no safe havens anywhere any longer.