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Michael Pettis

I recently called a Spanish friend  who has toyed with the idea of entering politics. If he ever wanted to do so, I told him, now was the time. 
There are two issues  that will move to the  centre of the political debate within a few years, and if he were to stake out radical positions now, his prestige and visibility  would soar.
First is Germany's role in the crisis. Over the next few years there will be a crescendo of blame directed at Germany as having caused the European crisis. Critics will point out that European monetary policy, which is often seen as driven primarily by Germany, was incompatible with policies that effectively suppressed German consumption and made a southern European debt crisis almost inevitable.
German domestic policies created large structural trade surpluses, and monetary integration forced the rest of Europe to choose between high unemployment on one hand and asset bubbles and rapidly rising debt-fuelled consumption on the other. For better or for worse, Europe chose the latter (with the active help of the European Central Bank), and is now paying the price, just as Germany is wagging a  finger at the shameless profligacy of the southerners.
Second is Spain's future within the monetary union. American economist Barry Eichengreen  once argued that the democratic enfranchisement of workers made a return to the gold standard impossible because workers, who had traditionally borne most of the burden of gold standard adjustment through rising unemployment, would no longer passively accept those policies.
Spain is in just such a position. Although most Spanish politicians continue to insist  Spain's joining the euro is irreversible and a symbol of its modernity, the fact is that in order to adjust, Spain is going to have to tolerate unemployment of 20 per cent or more for several years, and Spanish voters, correctly in my opinion, will not tolerate such an outcome.
The argument will be made by establishment politicians that to reject the euro will be seen as an indication of contemptible irresponsibility and will condemn Spain to developing-country status.   This was the same argument made against France in the early 1920s, when it was forced into a humiliating devaluation of the franc. Other European countries poured scorn on the irresponsible French and predicted economic disaster.
But they were wrong. Countries like France that were the quickest to recognise that orthodox monetary policies were untenable suffered less  during the subsequent years.  French leaders were able to pour scorn on those countries that had refused to recognise monetary reality and who suffered horribly during the 1930s.
The sooner Spain - and by extension the rest of southern Europe - recognises that current policies are untenable, the less damage  it will suffer. The current system, in which fiscal authority is concentrated in Madrid and monetary policy is determined by the needs of the euro, will create insurmountable political opposition as many years of high unemployment turn the population to more radical solutions. Spain will almost certainly have to choose: either  give up fiscal sovereignty - including, most importantly, taxation authority - to Brussels, or  give up the euro. 
The alternative - several years of difficult adjustment, borne mostly by workers - is politically unlikely.
Can Spain give up fiscal sovereignty? Actually that might be easier than many people think. Already there are strong separatist movements in many parts of Spain, and  some regional governments might be happy to reassign sovereignty from Madrid to Brussels in exchange for real relief from the burden of adjustment.
The problem with this strategy might  be Germany. Although one can easily posit a scenario in which Spain and other southern economies (for example Italy, with its own regionalist movements) reassign sovereignty to Brussels, unless Germany does the same the viability of a United States of Europe would be in question. It is hard to imagine, however, a situation in which Germany assigns fiscal sovereignty to Brussels. 
The only real European entity with any chance of viability, then, is the United States of Germany. 
Could that happen? Maybe, but rising anti-German feeling in many parts of Europe  would make this tough to swallow. If you do decide to follow my advice, I told my Spanish friend, I wouldn't bet too heavily on this particular outcome. It would be much safer to become vociferously anti-German and to demand that Spain exit the euro.
Michael Pettis is a professor of finance at the Guanghua School of Peking University and a senior associate at the Carnegie Endowment




Southern Europe's way out of crisis may require ceding sovereignty to Brussels