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Germany Is Smart to Plan for Death of Euro

(Clarifies the original Nov. 30 article to say the Greek and Ireland bailouts were conducted by the EU and IMF.)

NEW YORK ( TheStreet) -- It makes sense that there is a secret group within the German Bundesbank working on a plan to resurrect the Deutsche Mark. It would be a gross failure of national risk management if the central bank did not have a plan. Call it Operation Vollkreis.

Sovereign Extend and Pretend

Isn't this script getting a little tattered? Talk of a crisis starts. Sovereign yields rise. National politicians say no need for intervention. Austerity measures are introduced. Bond yields rise even more. Bailout is announced. Attention is then focused on the next domino.

Greece bought a couple of years with a 110 billion euro bailout by the European Union and the IMF.

Ireland has bought a couple of years with an 85 billion euro bailout, also by the EU and IMF.

Attention is now focused on Portugal. On deck is Spain, which is "the big one" (representing almost 11% of euro zone banking). To be very clear, the European Financial Stability Facility does not have the money to bail out Spain (though it can handle Portugal) -- nor is it realistic to think that the EFSF can be recharged to cover more than a few of the smaller peripheral countries.

More seriously -- what happens after Spain? The next big ones are Italy, Belgium and France.

There is only one country in the euro zone capable of bailing out the euro zone members: Germany. In my opinion, it is getting near to the point where the cost to Germany exceeds the benefit.

Who Is to Blame?

It is important to understand the differences between the collapses of Iceland, Greece and Ireland.

Let's start with Greece. This country was fiscally irresponsible. It racked up massive government debt paying for social programs that it could not afford. Investors foolishly (in hindsight) thought that Greek debt was no more risky than German sovereign debt. Greece's problem was that of fiscal mismanagement.

Given the political difficulty in implementing austerity measures, usually a country's currency is devalued. However, there was no Drachma to devalue. The country is stuck in the euro zone. The only choices the country has are sovereign default, extreme austerity, return to the Drachma -- or being bailed out. You know what was decided, but it really just buys Greece three more years.
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