Expert warns Germany it must transfer 8% GDP under restructured euro

Davos: Germany will need to transfer 8 per cent of its GDP to the fringe countries of a future Eurozone annually if the euro is restructured along the lines being pushed by Chancellor Angela Merkel, a top economist has said.

Niall Fergusen, a noted author and commentator on European economic and financial history, told a meeting at the World Economic Forum at Davos that transfers from the more prosperous regions to the periphery are an essential part of any fiscal and currency union - a fact not relayed to the German people by Merkel, he said.

"The political hot button is the transfer of resources, but Merkel should not dodge the issue. And she might even take comfort form that fact that it has happened before to great success," said Fergusen, pointing to Bismark's creation of federal Germany in the 1870s, when the (then) hard-working and thrifty northern states transferred huge sums to the (then) more lazy and fun-loving Bavarians.

Fergusen argued that Merkel's proposals for ‘More Europe" are absolutely essential if the euro is to work at all.

"Fiscal federalism is necessary for monetary union," he said. "Muddling through is just making it worse, and procrastination is a disaster."

He pointed out that he and a few other thinkers pointed out the institutional weaknesses in the management of the euro when it was created in 1990. "Back then we are castigated as Little Englanders," said the Scots Fergusen, "but now we are proved right."

Fergusen did not make a judgment on whether the euro was a good thing or not, but was very clear about some of the necessary economic requirements to make it work.

"Europe has to move from its present confederal system to a more federal one in the future; transfers have to go from the rich to the poor areas; and euro bonds must be issued by the empowered future European Central Bank if the euro is to work," he said.

He doubted that Greece would be able to stay in such a new more regulated system, and said that the European politicians have to move more quickly to remove the persistent uncertainty which is doing more damage than a decision which ever way it goes.

A further reason for the German people to welcome the system that Merkel is proposing, despite the huge cost to Germany, is the vast benefit that the euro has brought to Germany, and this was not just about access to the market of the euro zone, but also from the value of the euro.

"Just as a weak areas like Greece will need to devalue if they leave the euro, so will strong areas like Germany need to revalue if the euro collapses," said Fergusen. If Greece will have to devalue by as much as 40 per cent, Germany will need to revalue by up to 30 per cent.

Fergusen said that Germany has benefited hugely from the euro as a relatively cheap currency, keeping German exports from becoming too expensive. He pointed to the difficulties that virtuous Swiss had when the value of the Swiss franc soared as people piled into buy it, causing the prices of Swiss goods to rise sharply in the global markets. In the end this revaluation had to be stopped by intervention by the Swiss Central Bank.