The euro is in serious trouble.
A decade ago, the introduction of the euro, the common currency of 16 of the 27 EU member states, was a political decision -- not a monetary one. When the euro was introduced in 1999, Nobel Prize winner Milton Friedman wrote to his friend, the Italian economist Antonio Martino: “As you know, I am very negative about the euro and I am very doubtful about how it will work out. However, I am less pessimistic about it now than I was earlier simply because I never expected that the various countries would display the kind of discipline that was required in order to qualify for the euro.”
The problems result from the recent economic crisis which have badly affected the economy of Greece, one of the countries of the eurozone. Analysts doubt whether the government in Athens is able or willing to address Greece's financial problems. If not, the other 15 nations using the euro will suffer the consequences, which is something they are not likely to accept.
Thomas Mayer, the chief economist of Deutsche Bank, warned last week: “The situation is more serious than it has ever been since the introduction of the euro. […] If the Greece situation is handled badly, the Eurozone could break down, or face major inflation.”
The problems of the euro affect the entire world. The EU currency was not introduced because of economic considerations, but because the European Union is pretending to be a genuine state and states are expected to have single national currencies. Hoping to become a powerful political force in its own right, the EU adopted the euro as the common currency of some 327 million Europeans, so that the currency's economic power would prefigure the political power to be.
The eurozone represents the second largest economy in the world. During the past decade, the euro became the second largest reserve currency after the U.S. dollar. With banknotes and coins in circulation for more than â¬790 billion, the euro has surpassed the U.S. dollar's circulation. The euro appeared to be very strong, with the value of the U.S. dollar, the British pound, and other currencies dramatically falling in comparison to it -- one of the causes of Greece's problems. Tourism is a major economic sector in Greece. For tourists from outside the eurozone, such as the Americans and British, the country became too expensive as a holiday destination. Last year, when the world economic crisis also affected Europe, with a huge drop in the numbers of EU-citizens, such as Italians, who headed for Greece, the Greek economy collapsed and the Greek government was no longer able to pay the country's public debts.
With Greece facing bankruptcy, the fears about Greece's financial situation have led to a drop in value for the euro. Last week, the finance ministers of Germany and the Netherlands - the two eurozone countries which in pre-euro days had the strongest currencies in the EU: the German mark and the Dutch guilder - announced that they will not help Greece solve its problems. Polls indicate that 70% of the Germans oppose using their taxes to bail out other countries. Despite the EU propaganda line that EU citizens share a common European national identity, this is simply not true. As a leader in the Financial Times Deutschland noted earlier this month: “Spain believes in 'more Europe'. Whether that's the case for Germany as well one cannot be so sure any more.”
Moreover, the German economy has also been badly affected by the crisis. Last year, Germany's GDP fell by 5%, the biggest drop since the War, with a drop of 15% in exports and 20% in the sale of German manufactured goods. The German people are not prepared to lift countries such as Greece, Romania, Spain, Portugal and Ireland out of the recession at their own expense.
There is also a lot of anger towards the Greeks in the other EU countries: for some years Greece seems to have covered up its bad economic performance by officially presenting better economic figures than was the case. The promise of the Greek government to reduce Greece's budget deficit from 12.7% of GDP in 2009 to 2.8% in 2012, is being met with scepticism. Many doubt whether the government in Athens will be strong enough to resist the domestic pressure from the powerful trade unions against the radical deficit-cutting efforts that are needed, while others doubt that the Greeks will refrain from manipulating the economic data again.
Unwillingness to help the Greeks is huge within a eurozone currently facing an unemployment rate of 10% of the workforce, the highest figure since the single currency was introduced eleven years ago. Under EU rules, however, all the 27 member states of the EU, not just the 16 member states of the eurozone, are obliged to help the Greeks if the EU decides to bail them out. Article 122 of the EU Treaty, which went into force last December, states: “Where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the council of ministers, on a proposal from the European Commission, may grant, under certain conditions, Union financial assistance.”
This decision is taken on a majority vote. Consequently Britain, which always refused to join the eurozone, might be forced to help save the euro. The British press has already reported that if an EU rescue fund for Greece matches the Greek budget deficit, and if the EU decides that member states have to contribute in accordance with their own share of the total EU economy, Britain might be forced to pay a £7 billion bill to bail out Greece -- or perhaps even more, if other bankrupt eurozone countries, such as Spain, are excused their share.
British Eurosceptics fear that if Greece, which represents 3% of EU GDP, is bailed out, other eurozone countries facing financial difficulties (Spain, Portugal, Italy) might claim the same treatment. This, they say, would saddle Britain with a bill of £50 billion to save a currency in which the Brits have never believed.
Even though European public opinion is opposed to a bailout plan for the Greeks, Irwin Stelzer recently wrote in The Wall Street Journal that he expects European politicians to present just such a plan. “There is so much political capital invested in the euro by the political class,” he wrote,”that even the stern and parsimonious [German Chancellor] Angela Merkel will in the end contribute to a bailout fund if necessary.”
However, there also are indications to the contrary. Greek politicians might feel that the only way to avoid civil unrest in Greece might be to drop the euro and re-establish their own national currency, the Greek drachma. This would allow the Greek government to devalue the currency in order to stimulate exports and economic growth - a political-monetary tool which Athens lacks if it remains in the eurozone. It seems that some people at the European Central Bank (ECB), which controls the euro, favor such a move.
On Jan. 17, Ambrose Evans-Pritchard wrote in the London Daily Telegraph that at the ECB headquarters in Frankfurt the legal ground is being prepared for a euro break-up. A major problem, however, appears to be that once a country has accepted the euro it cannot get rid of it unless it leaves the EU altogether. “This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion.” Apart from Britain and Denmark, two countries which obtained opt-outs in the EU treaties, all EU member states are obliged to join the eurozone or peg their currencies to it. Former IMF analyst Desmond Lachman is quoted in CityAM warning: “There is every prospect that within two to three years...Greece's European membership will end with a bang.”
Evans-Pritchard also reports, however, that the dominant view of financial circles in London seems to be that “if a rescue [bailout of Greece] turns out to be necessary, a rescue will be mounted.” This is a bet, says Evans-Pritchard, that Berlin will do “what it did for East Germany: subsidise forever. It is a judgment on whether EMU is the binding coin of sacred solidarity or just a fixed exchange rate system like others before it. Politics will decide.”
Which brings us back to Milton Friedman: When politicians decide to rule economic and monetary issues, the results are usually catastrophic.
