Why is the Eurozon failing.

This leading article from Charles Crawford, former British Ambassador to Yugoslavia and Poland says all you need to now about the problems of the Euro.

We mere mortals cannot get our heads round the astounding phenomenon of Compound Interest. Thus the amusing school maths puzzle:

A lily-seed is dropped in the middle of a circular pond 64 feet in diameter. The seed starts to grow. The new lily-pad doubles in size every day. It takes 100 days to cover the pond fully. How long does it take to cover half the pond?

The average adult’s eyes glaze over. The hesitant reply comes: “Er… 50 days…?”

NO. If it doubles in size every day and covers the pond on the 100th day, it must have taken 99 days to cover half the pond. Duh.

In this imaginary example the lily pad has been actually invisible for most of the 100 days, but suddenly in the final few days it doubles and doubles and doubles up to previously unexpected – if not unimaginable – proportions.

This metaphor helps explain phenomena like al-Qaeda: they lurked below the consciousness horizon of Western opinion, quietly growing their networks, before launching into destructive action. They were playing on the tendency of busy Western leaders to say that if AQ were a problem at all, they were tomorrow’s problem: today’s problems are always more pressing.

In Italy’s case now, the country’s economic fundamentals are quite strong. Italians (unlike, say, Greeks) actually make stuff we all buy. But Italy is a sizeable country. This means that if the rest of the world’s confidence in Italy edges downwards, and interest rates for Italy’s bonds edge up, the absolute sums of money which Italy needs to pay back quickly soar to previously unexpected, startling levels.

Since no one is prepared to lend Italy the money to pay back these debts at affordable rates and Italy cannot quickly grow its economy to create the wealth to repay them (or devalue its currency), options dwindle fast. Italy must spend less on government programmes and divert that money to debt servicing. It must also cut spending, mainly by sacking expensive state employees. But since these measures – even on the toughest and most optimistic scale – won’t be enough to deal with the absolute scale of the problem, the euro system has to print money to pay back these debts.

Which brings us back to the Germans, who insist that that printing can’t happen: unwise in principle and/or unlawful under the EU’s treaties, they say. Dishonourable too. When the eurozone came in being, German leaders and officials (all with long family memories of savings being wiped out by inflationary mismanagements earlier in the twentieth century) toured Germany promising explicitly "no bail-outs for profligate eurozone members!"

That was the very point. Germany would surrender control over its beloved deutschmark but insist on (and get) tough rules to avoid being lumbered with other Europeans’ fecklessness.

Nice try. But right at the start of the eurozone project the Germans sold the pass, loosening the criteria to allow heavily indebted Belgium to join, as it was "politically unthinkable" that Belgium as one of the original European Economic Community founders should be embarrassed by being left out.

So, will the Germans now fold in the face of the potential horror of the eurozone’s possible collapse, and allow the ECB to "create" money as the lender of last resort to stop the markets gnawing away at eurozonic contradictions?

They insist noisily and repeatedly that they won’t. But that is consistent with (a) the Germans really meaning it and letting the chips in the inevitable disaster lie where they fall; and with (b) the Germans doing everything they possibly can to squeeze the last brutal droplets of reform and austerity from more profligate eurozone countries before completely changing course. Because (think the Germans, and they are right) if the Germans even hint at allowing the euro printing-presses to roll, all pressure on the worst-run eurozone countries to work responsibly immediately stops.

Meanwhile the interest-payment effect works in Germany’s favour. Germany is making significant "savings" by being seen as a safe borrower worthy of lower long-term interest rates. The UK too looks like one of the saner places to lend money – billions of pounds which would be spent on repaying loans can be earmarked for other purposes. France’s Finance Ministry, by contrast, must be aghast as the cost of borrowing piles on billions of Euros of French taxpayers’ money every time the market twitches in unease about France’s credibility.

Yet Germany is, basically, in a hopeless position, for all its fine work in responding to the previously over-valued DM by moving up the global competitivity rankings and managing costs and labour unions skilfully. Because the more the credit-ratings of other eurozone member countries erode, the more exposed sooner or later must be Germany’s own credit-rating.

Germany created a single monetary space. It can’t escape the inexorably compounding consequences.