Saturday, 3 December 2011

Will the Eurozone crack? [Va crăpa Eurozona?]

More than three years after the Wall Street Crash of 2008, the unthinkable demise of the euro and the break-up of the Eurozone has (apparently) become plausible.

It’s getting crystal clear even to the most fanatic euroenthusiasts that any imminent economic cataclysm cannot be blamed on convenient scapegoats anymore.

The lazy Greeks, the irresponsible governments in Eurozone weak links countries (PIIGS), along with greedy bankers everywhere may have played relatively secondary roles in influencing the destiny of the EMU.

Nevertheless, the fate of the European currency has never been – nor is it in these very days of turmoil – in the hands of less important actors like the above.

The devil lies in the details of EU treaties and especially in the chain of misdeeds committed by the political leaders of Europe, whether acting unilaterally, from Berlin, Paris or Rome, or together, from Brussels.

Hardly could the roots of the current crisis be located in Frankfurt, as the ECB has seldom had its hands united by the heads of state and government reunited in the Council of the Union.

More and more independent economists show that the mess engulfing the EU and threatening to blow up the global economy has systemic causes.

The EMU is on the brink of disaster because it lacks several fundamental premises of an efficient monetary union; it is made up of an econimic ‘giant’ (Germany) with 16 ‘feet of clay’ of various strengths from stronger (France) and weaker (Italy) muscles to negligible appendices (Estonia).

The ECB could be reasonably functioning as a central bank (if allowed to act do so), yet there is no effective equivalent of a national Treasury (Ministry of Finances) or Government in Brussels.

For decades, EU leaders have been deploring the lack of a common defence policy (greatly compensated by NATO) or of a common energy policy (whose absence contributes to the fact that Europeans are often ‘energy hostages’ of Russia).

It was fashionable to complain about these issues, however, none was as divisive and able to threaten the survival of the EU as the other skeleton that the current crisis took out of the Union’s closet – there is no common fiscal policy of the EMU.

In its absence, sooner or later, the Eurozone would be doomed to crack, like some analysts anticipated in the late 1990s, if not even longer before, around the dawn of this project.

The flaws of the EMU were known from the very beginning but swept under a carpet of great expectations about increased common prosperity.

For a while, the illusion worked. After the first months of wariness, when many Europeans in euro countries were shocked by price hikes, almost everyone grew accustomed with a stable currency, no need for exchange rates, low inflation and bearable interest rates.

The Greeks, Spaniards, Portuguese and others had access to cheap credit, while their tourist industries cashed in strong euros, instead of weak drachmas, pesetas or escudos.

In the meantime, the euro was weaker than how the Deutsche Mark would have probably been in the 2000s, enabling Germany to be biggest world exporter in 2007, ahead of China.

The success story seemed complete, and many warnings (like the ones about Italy being unfit for EMU membership (+ here, here, here) – see the pics*** illustrating this article!) were bluntly dismissed as nonsensical soothsaying.

Actually, there’s growing evidence that it was well-known to the architects of the euro that the Eurosystem was ill conceived from the start.

This didn’t prevent them from taking a huge gamble on the hope that a severe crisis (like the one the world has endured since 2008) would eventually help establish a “a more perfect union,” like the Constitution of the USA aimed in 1787.

Is this imperfect monetary union perfectible? Are the 17 euro countries willing to take upon themselves the full political cost of making the EMU truly functional?

And could giving up more of one country’s sovereignty guarantee anything for the EU’s citizens (“we the people,” if we were to quote the US Constitution again), apart from helping save the banking system from collapse?

Will a ‘full fiscal union’ work better than the current ailing EMU? The Eurosystem would probably run smoothly, yet the imbalances between the 17 economies would remain as grave as they are today, if not even worsen.

Smothering public deficits from the cradle would not grant choices of more responsible political leaders to European voters; it would merely ignite more vicious political battles and maybe even class conflict within nations.

And, riskier than anything else, wouldn’t this ‘EU Treasury’ remain as unaccountable to European citizens as other EU institutions and leaders that created the current ‘euro-mess’ have always been?

[For all the posts on this blog go to/Pentru toate postările de pe acest blog mergi la: Contents/Cuprins]

*** NOTE: Simon Tilford, from the Center for European Reform (London based think-tank), warned that “if Italy fails to improve its competitiveness, it will eventually have to leave the Eurozone” (2006).


Gregor said...

A really interesting article Bogdan

But do you think that the EU was 'a gamble' for all countries involved? Or do you think that Germany realised that GDP isn't everything and their political influence in the Mediterranean is possibly worth short-term losses? You write:
'Are the 17 euro countries willing to take upon themselves the full political cost of making the EMU truly functional?'

But aside from France/Germany/Benelux do they have the option not to?

MunteanUK said...


What else could I say that you are coming up with 'really interesting questions' as well? :-)

Now let me try giving some answers...

[1] In spite of what could seem my 'inquisitorial' tone against Germany, I am far from sharing the view that it's Berlin's 'fault' for the current mess.

It's neither 'exclusively', nor 'mainly' Germany's fault and it's probably an exaggeration to liken the Eurozone to a 'Fourth Reich'.

Just like Great Britain, Sweden and even Denmark (although the Danish economy is smaller), Germany had all the reasons in the world to be reluctant about giving up its stable currency.

But while the EU establishment had nothing to blackmail Britain and Denmark with (and had to agree with granting them 'opt-outs')...

...Germany was easier to press to accept the euro as a 'price' for Reunification, aside its burdening 'historical guilt'.

From another perspective, although Germany's exports benefited from a weaker (albeit stable) euro, German economic success story involved lots of sacrifices for the working class.

While the Greeks, Irish, Spaniards and Portuguese were 'having a ball' (in the early 2000s), wages were capped in Germany, and the famous German welfare state has gradually become less generous.

Let us make no mistake, it's still quite good to be a German citizen in such an insecure world, however, today's Germans can't count on as many privilege as were available in the `70s and `80s.


[2] I agree that Italy and Greece (presently ruled by unelected technocrats), along with Ireland, Spain and Portugal can't have other choice than to accept what Paris and Berlin will decide.

The same applies for most other euro countries with no particular economic or political 'weight' (Slovenia, Cyprus, Estonia, Malta etc).

Only slightly bigger counties like Austria and Slovakia could raise their voices in disagreement with any Merkel-Sarkozy 'diktat', but it's not likely, as long as their economies are tightly linked with the German one.

All in all, it's pretty sure that there will be another ceding of national sovereignty.

And it will all be packed and served to Europeans as a sine qua non condition for preserving the EMU, EU, prosperity on the continent, democracy blah-blah...

The problem is not that euro countries will be kneeling in front of Germany or a 'Franco-German Reich'; the problem that all this 'sacrifice' is made for the benefit of the banking system.

There are many views in this direction; here are but some from a Cypriot blogger: