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.