As Stratfor puts it, the Euro is intended to harness the power of Germany for good , by turning it into Europe's economic engine, while the rest of Europe turns into a captive economic market.
Europe has been a conglomeration of multiple regional economies, dependent on inland waterways. Where such waterways do not exist, you have agrarian economies with a less developed industrial base. As long as they were on different currencies, things were good and classical. The Euro changed everything:
Part of being within the same currency zone means being locked into the same market. One must compete with everyone else in that market for pretty much everything. This allows Slovaks to qualify for mortgage loans at the same interest rates the Dutch enjoy, but it also means that efficient Irish workers are actively competing with inefficient Spanish workers — or more to the issue of the day, that ultraefficient German workers are competing directly with ultrainefficient Greek workers.
In effect, capital-rich Germany lends to inefficient countries like Greece, allowing them to buy German goods. At the same time, the Euro keeps the Greek currency strong and prevents their inefficient production engines from being more competitive in the global market, turning them even more uncompetitive over time.
What do Greece and co get in return? Cheaper interest rates on Euro loans, enabling spendthrift governments to get on a permanent (or so they thought) easy-money borrow-and-spend ride powered by surplus cash from all over the world being invested in Euro debt. A debt-driven social democracy in the less productive parts of Europe was paid for by a Euro-debt-hungry world. Greece, Spain and co didn't mind being able to spend liberally without all that bother of having to create a sound economy to generate revenue. The perfect Faustian economic bargain, while it lasted.
Now the ride is over. Just like those AAA subprime loans, borrowers have figured out that Euro-denominated Greek (and Spanish, and Portugese) debt wasn't a safe place to put their money in after all. Well, duh!
Selling your soul to Mephistopheles usually doesn't end well.
To be read, as always, with the caveat that anyone who takes economic advice, or advice about economics, from someone who calls himself the Mad Hatter must have his head examined.
3 comments:
The two main advantages of currency union are capital mobility and stable exchange rates.
Europe has decided to do away with Monetary sovereignity in order to gain these two benefits. As most European countries (due to Geography) trade with each other mainly, both capital mobility and exchange rate stability remove two very real barriers to trade and allow the most efficient allocation of resources. Sharing a single currency has very real micro economic benefits.
The problems you state are real, but the root cause of the problem is that relinquishing monetary sovereignity whilst retaining fiscal freedom (or the ability to break fiscal rules) has led Greece towards disaster. Many countries have been here before, but Greece is now unable to devalue its currency and inflate away its debts.
For the future, either the countries give up fiscal independance, or at the very least draw up tight fiscal rules at the penalty of being kicked out, or the Euro goes. The Southern Europeans will need to get more efficient, and the Germans will have to pick up demand.
Grece meantime will be bailed out.
The politicians and civil servants of Europe have their lifes savings in Euros after all.
@Anon
You're right. In this case "efficient" allocation of capital would be the movement of capital to Germany et. al., from Greece et. al.
And as you state, the number one price that Greece & co paid is the inability to inflate their debt away and devalue their inefficiency away.
Fiscal discipline is not going to work. Europe has gotten used to being a social democracy, and European capital has gotten used to migrating to effective industrial producers like Germany and Ireland.Add the two, and you have the opposite of fiscal discipline.
And again, as you say, a short-term bailout will have to come from the richer parts of Europe.
Since the world's appetite for low-quality Euro debt (defined as Euro-denominated debt held by high-deficit countries) is unlikely to be high again, I expect there will be some permanent lending arrangement from the ECB to these countries, allowing them to keep their social spending high.
I think that's a fair price to pay for capital accumulation and a larger capital market, though German voters don't think so yet.
I should proofread my comments
"defined as Euro-denominated debt *issued* by high deficit countries"
"a larger *captive* market*
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