Sunday, 8 April 2012

Resurrection for the euro

This article was published in The Malta Independent on Sunday on 08 April 2012
Not only because it is Easter but mainly because the alternatives to a euro resurrection are too dire to contemplate, it is of utmost importance for European leaders to truly embark on a determined plan to save the currency, reconstruct it and resurrect it to its aspired status as a unifying force and a challenger to the dollar’s reserve currency status.

Unfortunately, recent events involving serial crisis bailouts, debt default and acute stress on the debt management ability of key eurozone countries has put the euro on reverse course. It has become a source of division between EU states and international investors are questioning its sustainability, which is an indispensable ingredient for an aspiring reserve currency.

The risk of the euro dismantling has suffered a severe adverse shift in the short space of three years, considering that in 2009 it pompously celebrated its first decade of relative calm and successful existence. Since then it has embarked on a seemingly unstoppable reverse journey from the unthinkable, to the very remote hypothesis, to the not impossible, to the very improbable, to the quite possible, to the present status of very probable unless something serious is done to restructure its whole setup.

We have arrived at a stage where a hefty prize of a quarter of a million pounds sterling (second only to the Nobel Prize) has been posted by the UK’s Lord Wolfson for the best thesis setting out a practical way of dismantling the euro with the least possible damage and disruption. This week, the work of five short-listed contestants has been published.*

My submission to this contest focused on how to save the euro rather than how to dismantle it. It was not short-listed. It seems that there is a strong wish from UK quarters to bury the euro rather than cure and resurrect it.

The five short-listed contestants have, in my opinion, made a futile effort on how to embark on an orderly process to deconstruct the euro without causing economic chaos. Unfortunately, this is not possible. One of them even dared to emphasise the need to maintain the utmost secrecy about such plans. How this could be done if the plan is publicised through an open competition defeats me.

If the euro is to be wound up, the process cannot be managed. There will be a very disorderly implosion with countries being forced by events to revert to their national currencies under severe stress, leading to the forced adoption of policies that betray the very principles on which the EU was founded. Countries will have to freeze bank deposits, impose strict control over the movement of capital, restrict free trade and, unavoidably, be dragged into beggar-thy-neighbour policies of competitive devaluations to maintain international competitiveness as the domestic money supply will have to be increased and the domestic currency debased for the sovereign to acquire the funds to meet payment obligations on its debt which is forcibly converted into domestic currency, causing a great loss of value to its holders.

It could lead to anarchy and the re-emergence of the military to take over due to the inability of democracy to keep order. Once the military sit on the seats of power there is little to stop the rules of economics being replaced by the rules of military might and a continental depression, possibly forcing a world-wide recession, would be a similar scenario to what brought about major continental repression and conflagration.

Unfortunately, the most influential leaders of euro countries, Chancellor Merkel of Germany and President Sarkozy of France, have proved themselves short of the necessary leadership skills to address the euro crisis. So far, all the measures have been designed to buy time rather than address the real crisis.

The decision-making structure in the EU is deficient and creates serious conflicts of interest between what such leaders need to do to save the euro system and what they need to do to keep their popularity with their domestic electorate on whom they depend for their political mandate at elections in France this spring and in Germany within 18 months.

How can Chancellor Merkel remain popular with her domestic base if she spells out the truth that the euro can only survive through German solidarity with fellow euro countries to heal their economic ills and render growth and competitiveness in Europe much more balanced? Chancellor Merkel has not been showing the sort of vision needed from leaders to pass to the next level of an ‘ever closer Europe’. Her insistence on austerity as the lynchpin of re-sanitisation for the economies of euro countries in distress shows her total blindness to the fact that Germany is itself one of the main sources of instability to the euro system and cannot simply expect the rest to become models of German Puritanism.

Members who give up their monetary sovereignty to form a monetary union can only survive if they operate comparable economic policies, including fiscal and borrowing policies, with homogeneous economic growth to ensure that the individual components all keep moving forward at roughly the same speed. The present euro model has delivered the exact opposite and is therefore clearly unsustainable.

Germany has kept its domestic costs down as its workers and unions accepted a long freeze on wages in a heroic contribution to facilitate the integration of the former communist east into one Germany. This means that whereas Germany is now super-competitive and can easily live with a euro rate of $1.50, most of the other eurozone members need a rate close to the original $1.18 in order to be competitive and Greece would need a rate of below parity to become internationally competitive.
The result is that, in spite of all the euro system instability, German super-competitiveness is keeping the euro above $1.30 which is fine for Germany but not for the rest of the group.

Unfortunately, this situation, together with the additional benefit of ultra low interest for German bonds, is such a short-term boost for Germany, that Merkel has every incentive to sustain the status quo by taking measures that only buy time rather than offer real solutions. But this is untenable and is the best way of ensuring that the euro will eventually implode – with dire consequences that will certainly not be in Germany’s interest.

Anyone who thinks the Greece situation has been resolved through the debt write-off, and that Greece can now become competitive and normal again, is grossly mistaken. Greece, for all the austerity that is being imposed on the most innocent of its people, is still an economic basket case. It will have to default again in two or three years’ time and this time the debtors left for further write-off will no longer be the private sector that has been very dishonestly dispossessed through the last debt write-off. The next one will include inter-governmental debt, including Malta’s loans to Greece under the bailouts. Malta might just as well start writing off the loans that it has been forced to make to Greece when, in reality, it was Germany and its likes that should have carried that burden rather than sharing it with the late arrivals to the euro. The late arrivals such as us did not benefit as did Germany from Greek largesse whilst it was going on when Germany looked the other way as it sold Daimlers and BMWs to the tax-evading Greek tycoons.

How many suicide notes such as this one, left by a Greek pensioner this week, can the system tolerate before it implodes?

“The occupation government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid for 35 years with no help from the state. And since my advanced age does not allow me a way of dynamically reacting, I see no other solution than this dignified end to my life, so I don’t find myself fishing through garbage cans for my sustenance.”
The euro political dynamics will change after the French elections this spring. Whether Sarkozy is re-elected, or is replaced by Hollande, France will adopt a less docile stance towards Germany. It will insist on a substantial increase to German wages as an indispensable ingredient for balancing out the austerity imposed on countries constrained to rein in their fiscal deficits and therefore needing export demand from German consumers to deliver complimentary growth to austerity, so that, unlike the Greek pensioner, the rest of the EU can see the light at the end of the tunnel.

For further elaboration on what needs to be done to save the euro, see the link below to my thesis** on this crucial subject for the protection of our economic well-being.



1 comment:

  1. Dear Alfred,
    Thank you very much for this. I do not propose to talk about the euro next week (though I'm sure others will), but rather about "Living Together: Combining Diversity and Freedom in 21st century Europe" - the title of the report I drafted last year for a Group of Eminent Persons appointed by the SG of the Council of Europe and chaired by Joschka Fischer. Currencies etc are not my area of expertise, but I do think that our ability to live together in a multicultural (not necessarily multiculturalIST - whatever that means) Europe is at least as important.
    all best wishes, Edward