Thoughts on the Euro

The Euro is an exceptional case, a dangerous experiment of a currency divorced from individual nations themselves. The Euro is a foreign currency to all its users -except, some may say, Germany which has insisted right from the start that the Euro should be, to all intents and purposes, a continuation of the DM.

All 18 governments that use the Euro are users not issuers of the currency. They have all scrapped their sovereign currencies. They now lack the powers that a sovereign issuer has. Japan, the United States, the U.K., Canada, Australia, are sovereign issuers. Governments that adopted the Euro must borrow the currency. They must pay whatever the bond vigilantes require. They can run out of money. And they lack the policy space of a sovereign issuer.

For a member of the Eurozone, such as Italy the relationship between the government and the currency is different from the UK’s relation to the pound. Italy does not issue the currency that it uses. A country giving up control of the currency effectively gives up its own independence. Italy has becomes a State like Georgia is the sense that Georgia is a State of the USA. Except that the Eurozone doesn’t have anything like the financial infrastructure, which exists in the USA, and which is needed to equalise the imbalances between the richer and poorer parts of the currency zone and make a common currency work.

The problem with the Euro is that it cannot be created as needed. The governments must go out and get Euros from someone else. The Eurozone countries have sacrificed their ability to conduct sensible economic policy, and the effects are clearer now than ever. Spain and Greece have unemployment rates of over 25%. Youth unemployment is over 50%. Unemployment is high everywhere. France has unemployment measured in double gigures. 1 in 4 of their young people are without work. The Eurozone as a whole is an economic disaster area.

But  the Europeans can’t say they weren’t warned. In 1997 Wynne Godley wrote:

“The danger then is that the budgetary restraint to which governments are individually committed will impart a dis-inflationary bias that locks Europe as a whole into a depression it is powerless to lift.”

The UK thankfully learned from its own experience the pitfalls of tying its own currency to another currency with its ill fated attempt to shadow the DM in the 90s. That ended in the debacle of Black Wednesday. But better a debacle than a disaster. At least the pound still existed, at the time, and could be freed. Greece and Spain don’t have their Drachma or Peseta any more. Just how they can free themselves from their predicament isn’t easy to see.

If you talk to most Germans , or read articles in the German media, you’ll notice a lot of finger pointing towards, particularly, the Greeks.  Their argument is basically one of ‘Look, we manage perfectly well with the Euro. If you sorted out your deficiencies then you could manage too’!

To decide if this is realistic we need to look  at the three sector balances for any country:

Public Sector Balance +Private Sector Balance + Rest of World Balance = 0

Germany runs a balance of trade surplus with the Rest of the World. Therefore the last term is negative.
The Private Sector save, in true German style, for their pensions etc. Therefore the second term is positive.
So the Government can comfortably run a closed to balanced budget without causing a deflationary effect on their economy.

It’s a lot different for Greece or Spain.
Their balance of trade is poor. Therefore the last term is positive.
There are still many who wish to save (people do when times are bad) so the second term is positive too.
The EU requires countries to minimise their deficit. So the periphery have to try to balance their budgets. The first term has to be close to zero.

So yes,  theoretically there is a lot that could be done to gather in more taxes from the rich in Greece. That could be done, of course. But fundamentally the German argument is nothing more than saying that if all countries had a balance of payments surplus then everyone could be like Germany!  The Germans are supposed to be smart and modern. Can’t they see the lack of logic?

The dictat of the EU is effectively one of trying to suspend the rules of basic arithmetic. The more Governments of the periphery countries try to achieve the impossible the more their economies spiral downwards in search of a ‘zero solution’ to the equation.

What can be done? Forcibly stop Greeks and Spaniards saving? Import controls within the Euro region? That would work but there are obvious problems! But, the first step is to at least recognise the reason for the problem. It’s pretty obvious but I don’t see any indications that the penny has dropped. German politicians, mainstream European economists, the IMF and many others are locked into a neo-liberal mindset.

They are like old fashioned doctors who prescribe the bleeding of a patient . When that doesn’t work they prescribe more bleeding. Then more and more until the patient dies! Afterwards they all agree that bleeding was the right course of action but they probably should have prescribed it earlier and in greater amounts! Is this supposed to be the 21st century?