Why The Eurozone Will Self-Destruct

Fireworks are going off in Germany again in yet another battle between Wolfgang Schaeuble, Germany’s finance minister, and the ECB.

Schaueble dismissed a suggestion this week by ECB head Mario Draghi that Germany should use fiscal room for manoeuvre to decrease its export surplus.


Reuters reports Germany’s Schaeuble blames ECB for German Export Surplus.

Germany has no plans to reduce its export surplus, Finance Minister Wolfgang Schaeuble said on Friday, as the European Central Bank (ECB) has not changed its monetary policy which has led to a weaker euro which in turn boosts German exports.

“Even before the European Central Bank decided its policies of unusual monetary policy, which also led to the euro exchange rate falling significantly, I said that we will increase German export surplus,” Schaueble told reporters.

“If the surplus in the euro zone as a whole rises by a total of 3.6 percent, one should not be surprised that the German export surplus has also risen, if not by 3.6 percent but by 2 percent,” he said before meeting other European finance ministers.

When asked whether he had any plans to decrease Germany’s export surplus, Schaeuble said: “I haven’t heard that the ECB is changing its monetary policy.”

The Munich-based Ifo economic institute has said Germany’s current account surplus would probably hit a new record of 278 billion euros ($313.28 billion) this year, overtaking that of China again to become the world’s largest.

Resounding No

I take that as a resounding “no” to Draghi’s proposal that Germany should reduce its export surplus.


No discussion of eurozone problems would be complete without a discussion of Target2, an abomination created by the eurozone founders and one of the fundamental flaws of the euro.

Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the “Club-Med” countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe.

Pater Tenebrarum at the Acting Man blog provides this easy to understand example: “Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been ‘acquired’ is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment.

Monetary policy can help external balances but it cannot fix internal target2 balances.

I will update the large and growing capital flight numbers soon.

Why the Eurozone Will Destruct

Germany will pay one way or another for the massive imbalances between the creditor and debtor Eurozone countries.

Eventually Spain, Greece, or Italy will realize it is impossible for them to pay back what is owed.

Once that realization sets in, some country will default on their euro-denominated liabilities. Beppe Grillo’s Five Star Movement in Italy is on board with that idea already.

There are only three possible paths at this point.

Three Alternative Paths

  1. Germany and the creditor nations forgive enough debt for Europe to grow
  2. Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe
  3. Breakup of the eurozone

Germany will not allow #1. It is unreasonable to expect #2 to last forever. The only door left open is door #3.

The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences.

Unfortunately, the most likely outcome is still a destructive breakup of the eurozone, starting in Italy or Greece.

Mike “Mish” Shedlock

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