EURO: how short-term politicking is threatening our continent

The excellent Roger Ehrenberger is angry (“Geting Real“); so am I.  I am angry at the continued bickering that paralyses Europe in the face of is sternest test yet.

Note: This is not a post about the impact on startups — for that you can go read the recent gigaom writeup by Bobbie Johnson.

Of course there is little to be surprised at; our supranationalist TechnoAuthority, defanged by fractious local electoralism, is yet again unable to produce a quality response.  We’re collapsing under our own weight, but it won’t be the politicians who pay the harshest price.

The EURO was the result of a great political project taken too far

When the EU was created, it was political in nature. Schuman famously declared the intent of the European project was to “make war not only unthinkable but materially impossible“.  Whilst it was supranational in nature, its early development was limited to creating a free market for coal and steel, a free-trade zone.

Political undertones always drove the European project, and never more so than with the introduction and widening of the EURO.  Whilst economists rarely agree on anything, it’s commonly accepted that marrying countries at vastly different stages of economic development is a bad idea.  Well, it was a bad idea.  We should have stuck to creating a free market for people and goods and left the currencies well alone.


Countries like Greece were always going to have a hard time

What do you get when you marry Greece and Germany under one currency, as seen from Athens:

  • Interest rates are low, which is an incentive to borrow, but there’s no inflation eroding the principal.  You have to repay in hard Euros, not cheap Drachmas.
  • Low interest rates designed to suit Germany or France fuel an insane real estate and credit bubble, partly driven by northern pensioners and real estate developers.
  • A ton of capital is flowing into your country from e.g. German banks who are seeing much better growth opportunities in your developing economy, making the credit and real estate bubbles more intense.
  • You’re now fighting head to head with the most competitive economy in the world with no ability for natural currency depreciation to help your competitiveness.  Good luck, Greek tools manufacturers !
  • Oh, you’ve just emerged from dictatorship and are a young democracy, so there’s plenty of corruption, low tax receipts and a fair amount of dodgy accounting, much of it with the benevolent help of London investment banks.
  • You become a tourist destination for rich German mittlestanders with no manufacturing sector and a mega pile of debt.

German benefits, German virtue

I used to be of the strong view that the German argument that put the blame squarely on Greece was a great hypocrisy given that the EURO made it possible for Germany to hit its neighbours with the full force of its awesome productivity improvements, but it’s clearly not that black and white; it’s hard for me to tell whether it would be right to call Germany the great Euro winner.  After all, capital mostly flowed to the periphery and there is no hard data I could find suggesting massive windfalls from Euro introduction.   KfW recently came out with a report suggesting massive gains for Germany, but I guess it depends on one’s view of how important a massive trade surplus is.  What is pretty certain is that the D-Mark would have made life harder for German exporters that the EURO — just ask the Swiss how they are feeling.

Time to stick together

So if the EURO was a bad idea, surely it’s time to let it go ?  Hold your horses there Northern Hawk, and think for a second.

It’s one thing to let Greece “restructure its debt”or “exchange its bonds” (for the unitiated, that’s a default, it’s just that a different of technology will be used).  In fact that part is probably a done deal now given that contagion needs to be stopped and the ECB cannot protect all its troubled children.

Kicking Greece out of the EURO however would probably trigger a crisis on the scale of Argentina.  That means life savings wiped out, a defunct banking sector, full-on capital outflows, and a decade or two of rebuilding trust.  That’s assuming of course that the Generals don’t come back in…  If you look at the depth and violence of the Argentinian crisis and what it did to people, you’d think a few times about letting that happen.

On top of that it is probable that the snowball effect costs of a EURO break-up could be gigantic compared to the perceived benefits.  If there is an out, and the markets know this, who else is coming out of the EURO ? Where does this stop ?  The likelihood is that a 60% markdown hit on Greece debt whilst keeping these guys in the EURO would be vastly cheaper than opening the pandora’s box on EURO breakup, let alone what you think of the social impact of a return to Drachma. See this Credit Suisse analysis.

Remember the 1930’s ?

When Paul-Henri Spaak and co. started working on the Treaty of Rome, their brains were still flooded with images of the 50 million dead across Europe.  Remember the terrible drama that resulted from  a deep currency crisis in the 1930’s and the emergence of a radical expansionist political party in Germany.  We have a different set of circumstances now and a profoundly changed Germany, but we also have a political landscape marked by petty regionalism (yes Belgium I am looking at you), racism, a difficult dialogue with Islam, a resurgent Russia, as well as a reluctance to accept issues such as population aging and globalisation.  The consequences could be dire.

Protect the EURO; redefine the boundaries of European power

Ever been to Alabama?  I hear it’s not exactly a happy place.  America has the willingness to stand together as a country and you don’t hear them talking of the introduction of Alabama Dollars.  We need to do the same and take the pain of supporting our companions, rather than cutting them loose.  I am convinced that the costs far outweigh the benefits.  Let Greece default, force banks to take the pain, but protect the EURO.

To avoid global irrelevance, we need to protect what we’ve built, continue to embrace Eastern Europe, and show some bloody leadership.  To me that starts with protecting the EURO, but it also means, once we’re past this, reforming European institutions ruthlessly, redefining and most likely limiting the definition of the European integration project to something that is more manageable and transparent, and generally putting it back into its box.  No more parliament in Strasburg and complex committees ruling on the acceptable shape of a banana, we need to claim this project back.

The Dutch Prime Minister, when opening the door to countries getting out of the EURO, is in my opinion being an idiot.  I guess we have the politicians we deserve: small-minded local traders who put to shame those who started this project and threaten our long-term prosperity.  It’s time we started voting again.


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6 Responses to EURO: how short-term politicking is threatening our continent

  1. Mattcharris says:

    this is very cogent analysis, thank you for taking the time. i have one naive question, which is simply this: if, as you say, putting countries at different levels of development under the same currency is a bad idea, why shouldn’t europe bit the bullet and unwind it? i understand that it’s expensive and dangerous, but i think all options are those things. in the venture business, i think we’ve all learned that the right answer is to make the hard decision and take the pain as soon as you can. why not here?

  2. FredDestin says:

    i asked myself that question too.

    My assumption currently is that if you withdraw from the euro, you’re creating a massive run on the currency and a lasting issue re: inbound capital, not to mention the mega risk related to simply opening the door to others. Instead of just asking the market to reprice the credit risk, we’re adding a currency / capital account problem.

    The hard pain to take is to allow default / bond exchanges etc right now but dropping the currency in the process will go too far and be much more destructive and expensive.

  3. DavidSmuts says:

    One of your best posts Fred!

    I disagree with your comment that the EURO was a flawed concept from the start. NO, the EURO was a great concept (as an economic one) but was poorly executed as you rightly say because of the political drivers. When we saw the figures being skewed and the European ERM (Exchange Rate Mechanism) qualifying financial criteria being missed by countries like France back in the ECU days one could see this wasn’t going to go smoothly.

    Only a handful of countries in the North central plains of Europe met the criteria and were disciplined as well as converged (very important) enough to join the EURO. Instead they lept ahead disregarding the very financial criterias set to ensure the viability of the currency and let anyone who wanted to join in join, including Greece.

    I was a huge opponent of the EURO through my years in the Labour Finance & Industry Group (advising the UK Labour government on economic matters) at that time and we in Britain OWE A HUGE debt of gratitude to Gordon Brown who prevented Tony Blair from joining the currency.

    The solution right now is, as you suggest; for Europe to come together. What does that mean? It means Germany agreeing to fund and ensure the EURO through the issue of a single EURO bond. In return the other countries of the EURO must cede sovereignty over their budget management to the ECB (read Germany). And fiscal union must be introduced. Not that I’m a fan of that…, but as for the EURO a single currency requires a single financial management structure.

    Longer term of course, the issue is not the EURO, rather it is inflated debt backed currencies including Sterling, Yen and the Dollar. We need a GLOBAL currency and that may very well end up being forced upon us sooner rather than later. At the end of the day…., money and money’s kind knows no sovereign allegiance. Money in and of itself is trans-national. We used to have a global currency for the last few millennia…, it was called GOLD. The new global currency won’t be gold alone, but rather a basket of a handful of currencies and a handful of selected commodities including gold.

    As for your comment that it’s time to vote. You’re partially right, but who for? The consumer-citizen has outsourced full responsibility for the management of their lives to a handful of political parties (just two players in the US). The politicians are not the ones who will bring about this change. It must be the power of the consumer-citizens (the “crowd”). This is how my company ELEXU (pronounced “elects you”) started out

    Change will only happen when the consumer-citizen stops outsourcing responsibility.

  4. Oriol says:

    congrats, great post. now … how we make our voice strong enough? I am afraid voting will not be enough.

  5. Henry Smith says:

    Fred, what happened to the free market economy? Why put a Greek patient on life support by blowing boat loads of cash on a society unwilling to get off their collective backsides, work hard and take the unpleasant tasting medicine that is austerity. I think we need a bit of economic Darwinism here…

  6. Fred, Roland Berger last week published this great alternative solution on how to deal with the Greek/Euro crisis essentially replicating the very successful model Germany put in place to absorb East Germany… Apparently it’s making its way within German circles but I am yet to see this discussed more broadly…