The European Monetary Union, the basis of the euro, began with a grand illusion. On one side were countries — Austria, Finland, Germany and the Netherlands — whose currencies had persistently appreciated, both within Europe and worldwide; the countries on the other side — Belgium, France, Greece, Italy, Portugal and Spain — had persistently depreciating currencies. Yet the union was devised as a one-size-fits-all structure. As a result, some countries had to use creative accounting to satisfy the fiscal criteria for entry — Greece, it’s long been known, went so far as to falsify its debt and deficit numbers.
Germany and other “euro-optimists” hoped that the introduction of a common currency and the global economic competitiveness it spurred would quickly lead to sweeping economic and societal modernization across the union. But the opposite has occurred. Rather than pulling the lagging countries forward, the low interest rates of the European Central Bank have lured governments and households, especially in the southern part of the euro zone, into frivolous budgetary policies and excessive consumption.
The Greek crisis is only the first of what could be several tremors resulting from the euro’s original sin. While few are willing to say it yet, the solution is clear: the only way to avoid further harm to the global economy is for Germany to lead its fellow stable states out of the euro and into a new and stronger currency bloc.
The notion of a single euro zone economy is false. Unlike their northern neighbors, the countries in the zone’s southern half have difficulty placing bonds — issued to finance their national deficits — with international capital investors. Nor are these countries competitive in the global economy, as shown by their high trade deficits.
These problems are only worsened by euro membership. If Greece were outside the euro zone, for example, it could devalue its currency to make it more competitive, and its foreign debts could be renegotiated in an international conference.
Instead, the fiscal strictures of the euro zone are forcing the country to curtail public expenditures, raise taxes and cut government employees’ salaries, actions that may push Greece into a deep depression and further undermine its already weak international credit standing. The alternative to this collapse, having other members of the euro zone assume its debt payments, is no better. Doing so would be a signal to other debtor countries that they could abandon their own remedial efforts and instead count on foreign assistance. The creditor countries would be brought to their knees.
In short, the euro is headed toward collapse.
Despite a ban on bailouts within the monetary union, last week the euro zone states agreed on a plan to provide Greece with an economic relief package if no other solution is found in the next few months. The plan not only undermines a core justification for the euro — continental fiscal discipline — but, according to a 1993 ruling by the German Federal Court, it would violate the monetary union’s founding treaty and therefore allow member states to withdraw.
If Germany were to take that opportunity and pull out of the euro, it wouldn’t be alone. The same calculus would probably lure Austria, Finland and the Netherlands — and perhaps France — to leave behind the high-debt states and join Germany in a new, stable bloc, perhaps even with a new common currency. This would be less painful than it might seem: the euro zone is already divided between these two groups, and the illusion that they are unified has caused untold economic complications.
A strong-currency bloc could fulfill the euro’s original purpose. Without having to worry about laggard states, the bloc would be able to follow a reliable and consistent monetary policy that would force the member governments to gradually reduce their national debt. The entire European economy would prosper. And the United States would gain an ally in any future reorganization of the world currency system and the global economy.
Moreover, should the United States fail to put in place a politically credible strategy to lower its own debt and move away from its zero interest rates, the new, more powerful euro could easily supersede the dollar as the global safe-haven currency.
This is not necessarily in anyone’s interests. Though it might benefit Europe in the long run, a move away from the dollar would cause global economic instability that would hurt surplus and debtor nations alike. But with the United States nowhere near to reducing its debt, the possibility of a catastrophic plunge in faith in the dollar cannot be ignored.
Better, at least, to have a solid fallback currency to which global investors could flee. The euro, as it now exists, could not be that currency. But a stable, revitalized euro could.
Joachim Starbatty, a professor emeritus of economics at the University of Tübingen. This article was translated by John Cullen from the German.