MercoPress. South Atlantic News Agency

Germany preparing for “orderly state insolvency” in support of the Euro

German Finance Minister Wolfgang Schaeuble, passionate defender of the Euro zone

Germany's push for an orderly insolvency process for indebted Euro zone states suggests Berlin is assuming the worst: that one of its peers -- most likely Greece -- will default on its debt repayments.

But by pressing for a process to deal with a potential default, Chancellor Angela Merkel and her finance minister are showing they want to hold the Euro zone together rather than eject deficit sinners.

Merkel, in the same speech in which she said “the Euro is in danger”, called last week for the Euro zone to develop “a process for an orderly state insolvency”.

Finance Minister Wolfgang Schaeuble -- a veteran from former chancellor Helmut Kohl's era and passionate defender of the Euro zone -- has also embraced the orderly insolvency idea publicly.

Their comments show they believe Europe's 750 billion Euro safety net for the Euro zone's members is a stop-gap measure that will need supplementing with an overhaul of its fiscal architecture to uphold the currency area's integrity in the long-term.

“Greece, in my view, will eventually default, and so Germany and France will have to find a way to let Athens default without bringing down the banking system,” said Josef Joffe, publisher-editor of respected German weekly Die Zeit.

“Orderly insolvency is not supposed to kick out Greece, but to keep it in,” he added.

The term 'orderly insolvency' picks up on an idea pitched earlier this year by Deutsche Bank chief economist Thomas Mayer, who raised the idea of 'orderly default' in a proposal he co-authored to create a European Monetary Fund (EMF).

Mayer said his focus in calling for a European Monetary Fund had been on managing the restructuring of over-indebted Euro zone countries to safeguard against systemic effects, rather than them quitting the currency club.

Countries' contributions to an EMF would be linked to their deficit and debt levels, under his proposal, with countries that breach the European Union's fiscal rules paying in more.

Merkel has embraced the concept, telling parliament last week that with a process for orderly insolvency of Euro zone countries “... we would create an important incentive for euro zone member states to keep their budgets in order”.

It would be good to set up an EMF soon, Mayer said, to supplement the euro zone safety net and a Greek aid package.