Euro could collapse in ‘three to six months’

The euro will collapse in the next three to six months if nothing dramatic is undertaken to save it, according to a leading German economist, who has called for fast and decisive action.

Euro could collapse in 'three to six months'
Photo: DPA

Gustav Horn, director of the Macroeconomic Policy Institute (IMK) in Düsseldorf, told the business daily Handelsblatt on Thursday one possibility would be for the European Central Bank (ECB) to reduce interest rates for crisis-hit countries down to a more sustainable level.

But he also said the International Monetary Fund (IMF) could step in to help, although he admitted this would increase the influence of the US, Japan and China on European economic matters.

“I give the euro three to six months if nothing happens,” he told the paper.

The ECB action “could happen quickly and would, under current circumstances, not create any danger of inflation,” he said.

It would be preferable to intervention of the IMF, as that “would equate to an admission of the eurozone being unable to solve its own problems,” said Horn.

Other voices are also calling for the ECB to act, with Hans-Peter Grüner, a former advisor to the bank, telling the Handelsblatt an intervention now would save the ECB from having to take action in “secondary markets”.

“But I do not think the ECB should categorically rule out further interventions in secondary markets. Those who speculate against Italy will probably have to deal with the EFSF and the ECB,” he said.

He said the EFSF – the European Financial Stability Facility – rescue fund would be able to stop the debt crisis from spreading if it was leveraged further – and also called for the IMF to contribute to the fund.

Horn’s dramatic warning is not the most alarming – last week the weekly Economist magazine said in a comment piece that the currency could have just weeks left.

“Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up with weeks,” it said.

The Local/hc

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Court turns down AfD-led challenge to Germany’s spending in pandemic

The German Constitutional Court rejected challenges Tuesday to Berlin's participation in the European Union's coronavirus recovery fund, but expressed some reservations about the massive package.

Court turns down AfD-led challenge to Germany's spending in pandemic

Germany last year ratified the €750-billion ($790-billion) fund, which offers loans and grants to EU countries hit hardest by the pandemic.

The court in Karlsruhe ruled on two challenges, one submitted by a former founder of the far-right AfD party, and the other by a businessman.

They argued the fund could ultimately lead to Germany, Europe’s biggest economy, having to take on the debts of other EU member states on a permanent basis.

But the Constitutional Court judges ruled the EU measure does not violate Germany’s Basic Law, which forbids the government from sharing other countries’ debts.

READ ALSO: Germany plans return to debt-limit rules in 2023

The judgement noted the government had stressed that the plan was “intended to be a one-time instrument in reaction to an unprecedented crisis”.

It also noted that the German parliament retains “sufficient influence in the decision-making process as to how the funds provided will be used”.

The judges, who ruled six to one against the challenges, did however express some reservations.

They questioned whether paying out such a large amount over the planned period – until 2026 – could really be considered “an exceptional measure” to fight the pandemic.

At least 37 percent of the funds are aimed at achieving climate targets, the judges said, noting it was hard to see a link between combating global warming and the pandemic.

READ ALSO: Germany to fast-track disputed €200 billion energy fund

They also warned against any permanent mechanism that could lead to EU members taking on joint liability over the long term.

Berenberg Bank economist Holger Schmieding said the ruling had “raised serious doubts whether the joint issuance to finance the fund is in line with” EU treaties.

“The German court — once again — emphasised German limits for EU fiscal integration,” he said.

The court had already thrown out a legal challenge, in April 2021, that had initially stopped Berlin from ratifying the financial package.

Along with French President Emmanuel Macron, then chancellor Angela Merkel sketched out the fund in 2020, which eventually was agreed by the EU’s 27 members in December.

The first funds were disbursed in summer 2021, with the most given to Italy and Spain, both hit hard by the pandemic.