Merkel's day of reckoning as taxpayer haircut on Greece looms Greece needs €100bn of debt forgiveness to get back on its feet, according to Barclays Capital. A lot of this is coming Germany's way. The creditor states can mask the damage for a while - siphoning off "frontloaded profits" on the ECB's holding off Greek bonds, and so on - but the overall sums are too large to cover up altogether. Der Spiegel says the looming cost for Germany is over €17bn, enough to leave a big hole in the country's 2014 budget. A line item would have to be written into the finance bill. Chancellor Angela Merkel would have to explain to critics on Left and Right in the Bundestag why her past assurances had come to nought, and why anybody should believe fresh assurances that Portugal is a safer bet. German taxpayers would at last discern - as some already suspect - that their elites have led them into a monetary Stalingrad. Mrs Merkel was still trying to duck the ghastly implications of this last week. There will be no taxpayer losses, she insisted after a meeting with the French. Of course we did not talk about debt haircuts: our view has not changed and nor should it. The fond hope of EU leaders and commissars is that the North-South chasm in competitiveness will be closed by "internal devaluations" in Club Med states before their democracies blow up. This morally indefesible policy relies on pushing unemployment to such traumatic levels that it breaks labour resistance to pay cuts, and as we can see from the youth jobless rates in Greece (58pc) Spain (55pc), Portugal (36pc), Italy (35pc) it can take carpet-bombing to achieve effect. The Left has been strangely willing to acquiesce, though the mood is changing. The European Trade Union Confederation awarded the EU a Nobel Austerity Prize last week, half in jest, half in bitter rebuke.. Perhaps the policy will "work" in a clinical sense but advocates draw too much comfort from Ireland's success. Ireland never had an exchange rate problem. It is highly competitive, with a fat trade surplus Marco Buti, the Commission's economics tsar ays there is "heartening evidence" that the North-South wage gap is closing at last. Real unit labour costs have risen 2pc in Germany from 2010-2012, and have fallen 5pc in Spain and Portugal, 6pc in Ireland, and 12pc in Greece. A study by Open Europe found that Club Med has indeed clawed back half the ground, but mostly by slashing public sector wages. Manufacturing pay has hardly moved. Private wages in Portugal's "tradable" sector have shot up. What is certain is that EU authorities have made the task much harder by fixing all key policy settings on contraction. Fiscal policy is too tight. Monetary policy is too tight. Regulatory policy is also too tight since it is forcing banks to raise capital buffers even as the slump deepens. The broad M3 money supply has contracted over the last six months. Lending to households and firms is not only contracting, but doing so at an accelerating rate. The combined effect of this triple-barrelled "pro-cyclical" shock is to push the eurozone into a second downward leg of the Long Slump. Last week's confirmation of a double-dip recession hardly does justice. Euroland is sliding into structural depression. Professor Paul de Grauwe from the London School of Economics said the deepening crisis is "entirely self-made" and "very dangerous" as passions fly. Angela Merkel had to slip into Portugal last week almost secretly to outwit demonstrators and avoid a "national sovereignty" march. One of her diplomats was assaulted by a mob in Greece. We know from the IMF's work on "fiscal multipliers" that austerity has gone beyond the therapeutic dose in all the victim countries. Output loss and damage to the tax base has renedered the policy largely self-defeating. The IMF has raised its 2013 public debt forecast for Portugal over the last year from 115pc to 124pc of GDP, for Spain from 73pc to 97pc, and for Italy 120pc to 128pc. It would have been so much easier for Euroland, for the Project, for North-South comity, if the ECB had let rip a long time ago with quantitative easing to cushion the blow from fiscal tightening, but that is to suppose a different Europe existed. North European leaders will now have to live with the consequences of their scorched-earth errors, with destructive effects cascading through the rest of the decade. Haircuts in Greece are just the amuse bouche.