Over the last few years, as the debt crisis has engulfed Europe, the risk that has most concerned economists has been the possibility that the so-called 'olive growing countries' of Portugal, Italy, Greece and Spain, joined by Ireland (and known as the PIIGS) might leave, or be forced out, of the Eurozone.
The possibility that Germany may choose to leave, however, is something that has received far less consideration. Though there can be little doubt the euro would survive without the Greeks or the Spanish, there is greater doubt of the euro surviving without the Germans solidly behind it. As the world's second largest reserve currency, the collapse of the euro would precipitate a major international monetary crisis.
It is one of those issues that now appears lost to history, but the Germans were not wildly enthusiastic about the euro in the years before the common currency. I would argue they were forced to accept the euro to obtain French support for Germany's post Cold War re-unification. In bidding Auf Wiedersehen to its treasured deutsche mark, Germany was intent upon making the new euro a worthy successor and, from its early days, insisted that sound money sentiments be imbued in the European Central Bank (ECB).
But more recently, as the over-borrowed PIIGS appeared near to default, the German political elite saw the opportunity to extend their political power by means of financial 'rescue' operations. If this effort fails, which I feel it will, the Germans may decide to go their own way.
Not surprisingly, austerity breeds political revulsion. This is particularly true when the austerity has been imposed by outside powers. Voter anger is expressed in the strong rise of non-establishment and extreme parties, including ultra-nationalists, and in some cases Communists.
Increasingly, Europeans are becoming resentful of Germany and the EU. Already, the governments of Greece, Italy and Spain have been threatened by their voters. Notably, a pro-German government in Holland has fallen in local elections, and French president Sarkozy is running behind in his reelection campaign precisely because of his perceived support of German policy.
From my perspective, German leaders were naïve to assume that their attempt to impose harsh terms on wayward borrowers would be accepted by local voters. The terms included the selection of new unelected national leaders in Greece and Italy. They were 'approved' by Germany and supported by the so-called 'Troika' of the ECB, the EU and the IMF. These leaders imposed austerity in return for the key German role in the rescue bailouts.
However, now that the German people are seeing that their hard won funds are being squandered on people who refuse to tighten their belts, resistance in Germany is growing.
Until a few weeks ago, it was felt that any breakup of the Eurozone would involve the expulsion of one or more of the weaker PIIGS members. Now, however, the dramatic possibility of Germany leaving the Eurozone has been brought into focus. Last week, two German members of the ECB abruptly resigned. This move has raised eyebrows the world over.
Given the panic that a rapidly falling euro could cause, it is possible that the euro is being defended by means of coordinated central banking actions and behind the scenes currency swaps. From my perspective, this may explain the relative stability of the euro at roughly the $1.30 level. If such coordination is occurring, it is difficult to predict how long it may last and how effective it will be.
Intended by world leaders as an economic, and thereby political, glue in the march towards pan-European sovereignty, the euro was launched without any real democratic consultation or approval. But now after 30 years of drift towards centralization, European voters appear to be chafing at the bit in this economic vision imposed from the top. This political problem is a clear and present danger threatening the future of the euro, the Eurozone and even of the EU.
Increasingly, the future of the euro appears to be influenced not just by debt default, but also by the politics of bailouts and austerity.
John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.