Why The European Periphery Needs A Post-Euro Strategy

We know for fact -- despite the feeble reassurances of the eurozone's finance ministers -- that the banking union's bail-in rule -- for reasons that I have explained at length here -- is already causing a slow-motion bank run on periphery banks, with periphery countries experiencing massive capital flight towards core countries (almost on par with 2012 levels), as bondholders and depositors flee the banks of the weaker countries in fear of looming bail-ins, confiscations, capital controls and bank failures of the kind that we have seen in Greece and Cyprus. Extending that same rule also to sovereigns would simply mean doubling down on a measure that is already exacerbating core-periphery imbalances and increasing (rather than reducing) the risk of banking crises. The risk is not limited just to periphery countries, of course, as the recent panic over Deutsche Bank testifies.

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As it turns out, the scenario foreseen by Bofinger is arguably already under way: in recent weeks the yields on Italian, Spanish and especially Portuguese government debt have started surging again for the first time since 2012, reviving fears of the sovereign ‘doom-loop' that ravaged the region four years ago. As Wolfgang Münchau writes, we are witnessing ‘the return of the toxic twins: the interaction between banks and their sovereigns', which the journalist blames squarely on the bail-in mechanism contained in the Bank Recovery and Resolution Directive (BRRD).

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Which begs the question: why is Germany pursuing so vehemently two proposals that are bound to increase the likelihood of a break-up of the monetary union? One possible explanation is that the German political establishment does not believe in the viability or desirability of the currency union anymore (in its current form at least) and is therefore either (i) planning for what it considers to be an inevitable outcome (by inflicting as much damage as possible to its potential competitors, for example) or (ii) deliberately creating a situation so unsustainable that periphery countries will have no choice but to exit.