Europe's Mistake

Opinion was quite divided when the euro was first introduced in 1999. The most common criticism at the time was the lack of control member states of the European Union would have over the currency. One currency, many countries. And each country with different economic parameters, employment, debt levels, and social systems. Interest rates set by the European Central Bank in Germany might be suitable for Berlin, but too onerous for Madrid. Liquidity levels might have been alright for the Benelux countries, but too high for others. Deficit levels, initially set at a maximum of 3% of GDP, proved to be unsuitable for practically all the member countries, and ridiculously low for some (read Italy, Spain, and yes, Greece). As such, it was routinely ignored by all.

After what has been happening in the last few months over in Euroland, the critics would not be happy for having been proven correct. It is that severe.

By far the most intractable problem involving the euro is sovereignty. Greece is in trouble, for reasons that bear no examination here (read high gov't spending, high gov't borrowing, black markets, low revenues - so what else is new?). It simply owes too much money. If Greece still had the drachma (love the sound of that word) it could be doing all kinds of wonderful things. Like what? Like devaluing the hell out of it ( lowering the value of the drachma relative to the U.S. dollar, or by injecting liquidity into the money supply by buying up old debt issue), thus making its billions ( in euros, dollars, does it really matter?) of debt cheaper to pay off. Of course, that would mean a significant haircut for anyone unlucky enough to have invested in Greek bonds to begin with, but at least, it's better than defaulting. A weaker drachma would also serve to stimulate economic growth, enlarging GDP and lowering debt ratios. As well, having your own currency allows you to have a central bank, with which you can control interest rates and money supply, all useful tools in guiding your own economy.

With the adoption of the euro, Greece traded sovereignty for what it thought was security. Greece cannot alter the value of the euro currency it uses, since it does not own the currency or a central bank, so an indispensable tool for dealing with long term debt is not available to it. As for security, ask the Germans. It's taken four months for Berlin to come to terms with this problem, and because of the delay it is now a crisis. Four months is a long time for the European Community dedicated to political and economic union to come to the aid of one of its members. Simply put, Germans don't like how the Greeks have spent their way into trouble, and are only coming to their aid now because speculators are shorting the euro (about time) and because European banks hold too much of that blasted Greek paper (still worth slightly more than the parchment it's printed on). And if Greece can't get its calls returned, what will happen when Spain and Italy go to speed dial? Hmmm... the plot will only get thicker.

The euro is now being exposed for the political decision it was, as it never made much sense monetarily, being just one more of the many top-down upheavals perpetrated on a helpless European public by the EU. Only now people of the have countries like Germany and France are balking at paying a bill they feel is not theirs, and governments in the have-nots are realizing the straightjacket they find themselves in.

The solution? Reverse the mistake. It may take years to unravel, and the embarrassment will be huge, but one by one, those toxic Club Med countries have to go back home. To their currencies, that is. They carry far too much debt relative to their GDP's , and if they're forced to roll it over, issue new bonds and ultimately pay any loan packages in euros at much higher interest rates than at present, well, you can kiss any kind of meaningful economic growth in those countries good-by for years to come - never mind the social cost of whatever economic austerity measures these countries would have to adhere to in order to qualify for the loans in the first place.

So, here's their choice. Riots, tear gas, molotov cocktails from malcontent gov't workers, pensioners, and the unemployed with the euro? Or a slow unravelling of all the googoo with massive devaluation involving all the old currencies you've known and loved. No one would lend to them again but what the hell, the Mediterranean would be so cheap to visit, they'll get it all back in spades.

by Rick Morris