To say that I've been "up all night" fretting about the Euro is an exaggeration, but I am deeply worried. This is the first time in recorded History that a currency is politically manipulated by 19 Parliaments, the way the Euro is. The awkward, blundering micro-management of the Euro by a bunch of politicians (led by the German finance minister Wolfgang Schaeuble who apparently understands nothing about either economics or monetary management) is deeply troubling.
In the early hours of Thursday 16 July, after much wrangling, the Greek Parliament approved the bailout deal - the passing of "reforms" against a "third bailout" on much stricter terms - sealing its fate: the Euro show (with attendant austerity) goes on. Now the European Central Bank must provide emergency funding to revive the banking system and keep the Greek economy tottering forward.
The Euro has already lost more than 9 percent against the dollar and stands to lose more as this Greek tragedy continues. And Grexit is still not off the table: once again Schaeuble aired the view that a temporary Greek exit from the 19-nation euro region may be “the better way” since it would allow for the debt forgiveness that is presently banned under "Euro rules", i.e. the rules as he understands them (see Bloomberg here). The general idea is that Greece is tiny, just 2 percent of total eurozone gross domestic product, and that its fate, whether in or out, can't affect the Euro.
So the Euro is saved for now. But given that premise, where is the Euro, that totally novel, politically mismanaged currency, headed over the long run?
Three reasons why the "bailout deal" with Greece will inevitably lead to the breakdown of the Euro, marking the end of the European project of a United States of Europe:
1. Greece's creditors, Germany foremost, do not recognize that a currency union is necessarily a transfer union: the Euro can survive only if it is managed like the US dollar, with a Central Bank and a Treasury ensuring the fiscal transfers needed for currency stability. In the US, in 2014, 28 American states sent the equivalent of 2.3 percent of their gross domestic product through the US federal budget to 22 other states of the Union, the biggest donor was Delaware (21 percent of its GDP) and the biggest recipient was North Dakota (90 percent). In the Eurozone, by comparison, Germany, the biggest donor, sent 0.2 of its GDP through the EU budget and Greece received 0.2 percent: that's ten times less, a pittance. The data is for 2011 but it's about the same each year, there's no flexibility, no built-in adjustment in the EU system. By contrast, every April, the banks in the Federal Reserve system smooth out regional imbalances in the system, re-allocating every asset and writing off what cannot be recovered - to recognize losses and write them off is not daring or risky, it's merely sound financial management.
2. Germany's unrelenting insistence on fiscal sovereignty and "Euro rules": this has prevented the establishment of mechanisms needed to bring flexibility and resilience to the Euro. Now it is Greece that is facing default, but in future a recession and a wave of bad loans could hit any country in the Eurozone, for example, a big economy like Italy's, and there is nothing to stabilize the system: the European Stability Mechanism is minuscule (it could not handle an Italian disaster), it is limited in use and ultimately dependent for its functioning - as we now see with the Greek bailout saga - on the goodwill of European Parliaments, in particular Germany's.
The necessary mechanisms are at least three:
- a pooled-unemployment scheme
- a sytem-wide scheme of bank-deposit insurance
- collectively guaranteed Euro-bonds
Number (3) is essential in the absence of a common European Treasury.
Collectively guaranteed Euro-bonds have been proposed as soon as the Greek sovereign debt crisis broke out and Germany has never accepted the proposal. Yet it is the only proposal that could save the Euro in the short term. Squeezing an economy the way Greece is being squeezed solves nothing: as you slap on taxes and cut back on State expenditures, you necessarily reduce overall demand in the economy. This makes it impossible to achieve the kind of income that allows for tax revenues to rise, making it possible to re-pay the debt.
Euro-bonds would solve the debt problem immediately while allowing the Greek economy to recover - and in a recovering economy, it becomes politically feasible to take all the needed measures to reform pensions, rationalize the Greek bureaucracy and remove other excesses. In the current political atmosphere in Greece, additional austerity measures as called for by Germany are irrealistic, irresponsible and morally reprehensible. And not likely to be implemented. But Germany won't hear of Euro-bonds...Anyone in Germany reading me? Please, spread the word...
3. The idea that the Euro is an indissoluble monetary union is now dead - yet that had been the only feature that kept the Euro alive without putting in place the necessary mechanisms described above: (1) a common European Treasury and (2) unemployment schemes, bank-deposit insurance and Euro-bonds.
The idea is growing that the Eurozone should be made of like-minded, economically equal partners, i.e. Northern Europe by itself, leaving out the "profligate, lazy" South - you start with kicking out Greece and next Portugal, Spain, Ireland, Italy and yes, France too, why not? It's often talked of as the "sick man of Europe", who needs France in the Euro?
And you do all this in an "orderly manner". So, no problem, right?
And you do all this in an "orderly manner". So, no problem, right?
This is a dangerous idea, it spells the breakdown of the famous French-German partnership in Europe.
But the real problem with this idea is that it makes economic sense. Since Germany cannot let go of fiscal sovereignty, a Euro limited to Germany and a few like-minded Northern European countries is the only kind of Euro that could reasonably survive in the long run as a stable, functioning currency.
If this is the outcome of repeated bailouts for Greece and/or an eventual Grexit, tell me what's left of the European Project? The Euro was supposed to be a tool to push the Union and force the countries of Europe to come together.
So far, the Euro has failed miserably in this task and the European ethics of all-for-one and one-for-all are dead and buried...
Source of photos: screenshots taken from Reuters video "Greeks fear cost of new deal" (here)
The data for the above analysis is taken from the following excellent articles that I highly recommend you read if you have time:
Eric Beinhocker on Bloomberg Views "Europe's Insane Deal with Greece":
Clive Crook on BV: "Europe Owns this Disaster":
Christian Odendahl, John Springford on Centre for European Reform: "The Greek bailout deal resolves nothing"
Eric Beinhocker is Executive Director, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, author of The Origin of Wealth
Clive Crook is a Bloomberg View columnist and a member of the Bloomberg View editorial board. A former chief Washington commentator of the Financial Times, he previously worked at the Economist and as a senior editor at the Atlantic.
Christian Odendahl is chief economist at the Centre for European Reform. Christian works on European macroeconomics and growth; the eurozone, its institutions and political economy, monetary and fiscal policy; as well as German politics and economics.
John Springford is a senior research fellow, working on economic issues, at the Centre for European Reform in London. He acted as secretary to the CER’s commission on the economic consequences of leaving the EU, which published its final report in June 2014.