Gwynne Dyer: The death of the euro

“All the principles of the currency union have been sacrificed....All the stability rules are being broken to save the euro,” wrote the voice of German conservatism, the Frankfurter Allgemeine Zeitung, after the massive EU bailout of May 10. “How can that work out well? This presages...the failure of monetary union.”

The EU agreed a 110 billion euro bailout for Greece two weeks ago, but it waited too long: by then suspicious market traders were targeting the Spanish and Portuguese economies as well. So in an eleven-hour crisis meeting on May 10, EU ministers came up with a 720 billion euro package of loans and guarantees—almost a trillion dollars—that will be available to any EU country that needs it in order to quell the speculation.

Even then, it took two calls from President Barack Obama to persuade them to act together and stop a crisis of confidence that threatened to cause a panic in the markets as big as the collapse of the Lehman Brothers bank in September 2008. The very belated EU response was certainly “shock and awe, part 2 and in 3-D”, as one observer called it, but it didn’t solve the underlying problem.

It has been 11 years since the euro replaced the francs, marks, drachmas, and pesetas of the original 12 members of the “eurozone”, and the current world financial crisis was its first major test. It very nearly flunked it, for two reasons. One was the unmanageable debts of countries that should never have joined in the first place, like Greece. The other was the sheer lack of political institutions strong enough to protect the currency in a crisis.

The (mostly discouraging) history of previous attempts to create a common currency argues that political union must precede monetary union, because only a strong central authority can really make the decisions that are needed to defend a currency in times of crisis. And the crises always come, sooner or later: wars, revolutions, depressions, oil embargoes, and other unpredictable but inevitable upheavals.

Nobody could accuse the European Union of having a “strong central authority.” The euro was one of a number of projects intended to summon into existence the united Europe state that many members of the European political elites dreamed of, but had never been able to negotiate directly. (Another was the Schengen treaty that eliminated border controls between almost all EU members.)

No harm in trying, you might say, but the way it was done was bound to make the new currency very vulnerable to the sort of nasty surprises that history deals out from time to time. Even the initial 12 countries were divided between a mostly northern European group with high productivity and strong currencies (e.g. Germany, France, and the Netherlands), and a quartet of Mediterranean countries with lower productivity and weak currencies.

It’s easy to understand why Spain, Portugal, and Greece wanted to join the euro. They had only escaped from quite nasty dictatorships in the 1970s, and being part of a common European currency was one of the ways they could reassure themselves that that was all behind them now. Italy’s motives for joining were less obvious, but mostly had to do with its perennial desire to see itself as one of the great powers of Western Europe.

The problem was that in no case were they economically fit to join. The way these countries traditionally dealt with their productivity deficit was to slowly but steadily devalue their currencies, thus keeping the prices of what they exported competitive. Once they were locked into the euro, a one-size-fits-all currency, they could no longer do that.

It took time for the damage to show, but it’s certainly visible now. Unemployment in Spain is 20 percent, and youth unemployment is a catastrophic 42 percent. In Italy, 26 percent of the 16-24 age group are out of work, while in Greece it is at 25 percent but getting rapidly worse.

The huge EU bailout solves the immediate financial crisis, but it does not solve the problems of the Mediterranean countries. They have huge debts, and there is no way their economies can grow out of the difficulties so long as membership in the euro cripples their competitiveness. They are not in a recession; they are in a depression.

A substantial devaluation of the euro itself, combined with serious efforts in Spain, Italy, and Portugal to improve productivity, might enable them to stay in the single European currency and still regain domestic prosperity, but for Greece it is almost certainly too late.

For too long governments in Athens lived beyond their means, and covered up the real gravity of the country’s financial situation by cooking the books. The present government is quite different, but it cannot deal with the accumulated debts if it stays the euro. It will probably have to withdraw from the single currency and default on its debts within two years.

Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.