Writing in 1776, the year of the Declaration of Independence, Adam Smith explained how “The Wealth of Nations” depended on breaking free from the monopoly power of vested interests and letting free markets dictate commerce, and how this was key to America’s growth at that time. Restoring the wealth of Europe today requires the same approach. Moreover, a strong economy is essential to give European countries the confidence and resources to play their part in NATO and stand up to an expansionist Russia and Iran.
At formation, the idealistic single-tier euro was driven by dreams that it would bring about a United States of Europe. It would involve countries with sharply different attitudes toward debt and spending, and with different social goals. French economist Jean Monnet fought to bring about a common market to prevent another world war breaking out in Europe, not for a common currency. It is time to return to reality and common sense.
The opportunity is to divide the euro into three separate and independent euros, which would float against each other, with the free market setting their relative value. Broadly speaking, the present euro would remain the currency of the Northern European countries, euro-M of the Mediterranean countries and euro-F of France and any other financially strong countries that prefer the French approach to stimulating growth by spending.
Euro-M would immediately drop in value to perhaps one-half of the euro. This would give the Mediterranean countries a quick gross domestic product boost through an increase in the number of people taking vacations or relocating there for retirement living. It would bring back many old customers who have been priced out of the market and, in consequence, improve property demand and need for regional airline travel. It would engender confidence in the future.
The euro has given Germany a roughly 20 percent currency advantage, demonstrated by its increase in the European vehicle market from one-third to one-half. The three-tier euro should remove this advantage.
Expansionary actions by President Mario Draghi of the European Central Bank do not address the underlying problems. The emperor has no clothes, and these at best are just a loincloth.
The euro crisis cannot be solved by severe spending cuts and layoffs, which would cause the European economies to spiral down, and greatly damage the whole interdependent world economy. In other words, the operation would be successful, but unfortunately, the patient would have died.
The three-tier euro will not come about without effective leadership. Here a major problem is the bloated bureaucracy in Brussels. There is no example in recorded history of a bureaucracy reforming itself. The old saying that the greatest obstacle to progress is resistance to change will certainly apply here.
Change requires a small group of key, committed and influential people to command. Here one approach would be for German Chancellor Angela Merkel and Mr. Draghi to form a core team, and then bring in support from the International Monetary Fund (IMF), the World Bank, the European Development Bank and elsewhere. The IMF cannot be directly involved since its constitution does not permit it to support the three-tier euro.
The European community can absorb the financial cost of Greece leaving the euro, commonly termed “Grexit.” However, the effect on NATO would be very serious.
In Finland, a majority of the voters oppose giving any further aid to Greece, and the new government has made clear that it will not approve of aid from the European Central Bank or other sources. Should this be proposed, Finland would probably withdraw from the euro.
Finnish withdrawal might cause the collapse of the euro house of cards, causing a return to national currencies with devastating economic impact. Finland might decide to remain in the eurozone if the three-tier euro were adopted and satisfactory reforms put in place. There would still be a very heavy price to pay with the necessary haircut, but much less than with return to national currencies.
Thus, all debt in euro-M and euro-F countries would become payable in these currencies, with affordable longer terms, with two main exceptions. First, all debt to the International Monetary Fund would remain payable in euros, with extended terms. Second, in fairness and to prevent bank runs, all private savings would remain in euros.
In the longer term, the three-tier euro system should give useful economic growth, so the countries taking the haircut, principally Germany, could well see their debt holdings increase in value.
Politicians like to “kick the can down the road” rather than face expensive reality. We need to face the issue of paying for the true cost of the damage done by the single-tier euro.
In summary, adopting the three-tier euro should keep Greece in the euro and give essential economic growth to the Mediterranean countries, while keeping Russia and Iran from breaching NATO.
Robert Laidley is president of the Atlantic and Conservation Institute.