No amount of “cunning plans” will save the Euro now


Why the Euro project should embrace failure

“Never ascribe to conspiracy that which is adequately explained by incompetence.” Napoleon

Here’s an interesting question you don’t hear asked very often, if at all: What specific problem was the introduction of the Euro supposed to solve?

It’s interesting because the point of initiating new projects is usually to solve a problem or improve something. Trouble is, when you think of the Euro in these terms, it is hard to grasp what its introduction was supposed to actually achieve.

I can think of three possible answers. Let’s call these the federal, peace and convenience cases.

The federal case

Proponents of this view believe that the Euro is a necessary stepping stone towards tighter European integration. While the ultimate goal of this trajectory may or may not be the emergence of a truly federal state (a United States of Europe, so to speak), it is clear that this camp values the further integration of such things as taxes, labour legislation and welfare provision. Why? Because this would build a stronger EU block, one which would then be a true giant on the world stage, one which could both challenge the current hegemony of the United States and the ambitions of China at the same time.

Regardless of whether you are a supporter of this vision or not, one of the key issues with this explanation is that by introducing the Euro first, the federal camp has put the currency cart before the reform horse. For the Euro to have any chance of working, you really do need to work towards better integration of taxes, labour laws and welfare (amongst other things), but you need to do this before introducing a single currency. Doing it in reverse order merely exacerbates and amplifies these differences, rather than helping to keep them in check. Think Greece and Germany and you can see this is precisely where we are now.

Peace has broken out?

The second suggested problem goes something like this: countries that share the same currency don’t go to war. There is no doubt that this is a noble aim – who amongst us doesn’t want peace? Unfortunately this is not proving to be true. If anything the fissures and strains being caused by the Euro are actually putting Europe at risk. It is probably far-fetched to say that the Euro itself will lead to war; however with insults flying across borders and the far right parties pitching into the emerging political void, it is most certainly not helping with regard to keeping friendly relations between states.

The lazy traveller

The third and final problem that the Euro has been stated to solve is that of convenience. In short: single currencies are convenient to travellers, and means we don’t need to visit that Forex shop so often. This argument would be laughable if the current situation wasn’t so serious. On another level it’s not even true. We’ve had a single currency for years. It’s called a credit card.

Sound foundations?

So if the Euro isn’t doing such a great job of fixing any of the three potential problems we’ve identified, where does that leave us?

Some may still argue that, even though the Euro wasn’t designed to fix or improve anything, the principle of a single currency is still economically sound; therefore the Euro should stay and is worth fighting for. The big question to ask here is this: why do the proponents of the Euro believe this?

I think those who argue that the Euro is built on sound economic foundations are either having a joke at our (very considerable) expense, or woefully naïve. Like Napoleon, let’s be generous and assume the latter.

To demonstrate the poor economics of the Euro, here’s some extremely interesting analysis from Michael Cembalest, the CIO of JPMorgan. What he’s done is look at over 100 factors against which countries could be compared (such as global competitiveness, government institutions, corruption, debt levels, health and education, business sophistication, labour markets and capacity for innovation – to name but a few), and then put some countries into different, imaginary groups to see how they stack up to the actual grouping of the EMU.

Michael Cembalest's data shows how poorly the EMU region stacks up.

Michael Cembalest’s data shows how poorly the EMU region stacks up.

If you have a close look at this, and you’ll spot the killer punch. Even a grouping of a random selection of countries (those that begin with the letter “M”) have more in common when looking at these 100+ factors than the current grouping of the countries in the EMU block.

That’s pretty alarming.

As Cembalest argues, “you can ignore economics but it doesn’t mean that economics is going to ignore you”. That, in a nutshell, is the headache we are dealing with now. In other words we’ll need to put in the hard work and slog of the getting the reform horse right first, before we should even consider attaching a currency cart. You basically need to drag that tall bar way down, and as you can see, that’s some task.

Euro to blame?

But is this really all the Euro’s fault? Isn’t it just being portrayed as a scapegoat here? Surely there are other factors at play? That’s true; there are plenty of fundamental reforms out there that need to happen in order to get some of the worst performing countries back on track.

But here’s where the Euro has had a huge part to play in actually stopping those radical reforms from happening. When the Euro arrived, it flooded some of the more fragile markets with cheap credit, propelling them into a looking glass world where it seemed more or less anyone could afford more or less anything. Governments and peoples (we can’t just blame the politicians here) went on a spending spree, and all of those much needed reforms were put on ice – if not forgotten about altogether. It was party time! Big up your debt! Trouble is, all those problems didn’t go away, they just went into hibernation, and now the party is most definitely over, they’re back and they’re hungry, and no amount of Euro dollars seems to be able to satiate their appetite.

So if the Euro is not fixing any problems but instead generating them, and it’s also not economically sound too boot, then it starts to look like what it is – a failing political project that is literally costing us billions (if not potentially trillions) to keep on life support. It is, I suspect, one of the greatest boondoggle projects ever conceived by mankind. What makes this even more tragic is that the road we are heading down is one paved with good intentions, such as integration, peace and convenience.

Cunning Plans

So what should we do? The answer is, I think, obvious. We kill it. There is simply no way to save something that is this fundamentally unsound, and nor should we try. There are serious issues and reforms to deal with and the Euro is taking up far too much of our time, resources and money. Europe needs to be competitive again, and spend more money supporting R&D and entrepreneurs, but the Euro is getting in the way and throwing us off course.

Killing something is not a pretty solution, I admit, but better that then the endless series of hastily agreed carrot and stick solutions (the “bailouts and blackmail” approach) whose rules and goalposts change from one horrendous incident to the next. All too often they feel like the real life equivalents of the “cunning plans” that Baldrick from Blackadder proposes – “My Lord, we’ll solve the problem of the sinking house by building another floor on top”.

The brave (and competent) politicians we need now are not the ones with yet another rescue plan for the Euro, but the ones who come up with the best plan for the least painful exit. As Gideon Rachman on the FT once argued, the German’s have the best quote for this kind of situation, “better an end with horror than a horror without end.”

Footnote: I am very much a pro-European, but I am definitely very sceptical about the Euro. It is possible to hold both of these propositions without being in contradiction. In fact it is precisely because I am pro-European that I am anti-Euro.


5 thoughts on “No amount of “cunning plans” will save the Euro now

  1. Interesting Michael but I think you’ve brought together several separate strands. The prime aim for the euro in the last 80s and early 90s was the development of the single market. A shared currency was seen as a core element of the single market: don’t forget that for all the high flown phrases about the EU it has always been based on trade. The currency instabilities of the 70s and 80s were fresh in the memory. As now the UK was keen on the single market (UK Commissioner did the spade work). So the introduction of EMU and then the Euro had a logical underpinning. What went wrong?
    * France and the Germany were let off when they exceeded the Maastricht criteria. As this happened so soon after the introduction it sent the message that the political controls were not relevant.
    * Countries joined based on a political assessment: Italy to start with and then Greece, Spain. None were economically ready to join but varying political balances took over. This meant the variances between euro countries became excarbated.. allowing Germany to boom based on a unfair interest rate compared with the southern members.
    * no-one saw the enormous explosion of credit from 2000 onwards. Whether public or private the EU was generally fuelled by spending the next decades income in between 2003-8.
    And now? Unless and until Germany accepts that much of its current prosperity came courtesy of the low interest rate and credit fueled economies in the south the euro will remain parlous. Austerity is plan stupid when applied to alll countries. Germany’s schroder reforms only worked on the back of exports which relied on booming economies. The euro does require a shared lender of last resort function, with eurobonds etc. The USA exists comfortably with various tax regimes state by state: Delaware plays the Luxembourg tax haven role, Sales taxes etc vary as VAT does in EU. The single market logic, with the required free movement of labour, will mean a migration from poorer parts to richer parts.. as in a single country.
    Will it happen, after the Merkel re-election? Another crisis will force it. But it will be painful. The Eu budget showed how weak our political leaders are: a good strategy in EU2020 matched with a budget plan designed for the 1950s.
    Like you I’m a pro-EU, still have my “keep Britain In” posters and badges from the 1975 referendum but I despair at the weakness of our political leaders. (and that is not a call for a return of Thatcher!!!!).

    • A great post Steve and brilliant analysis! Better than my original post if you ask me. Yes, I admit it, I’ve missed one of the key reasons given for the Euro being introduced, and that’s to increase trade. As you’ve no doubt noticed, I’ve got nothing against increased trade – far from it – I welcome it with open arms as it’s to the benefit of all of us in the end, both those who live in the EU and those we trade with outside it. Unfortunately we can strike off the “increased trade” reason too. Why? Because the evidence I can find (see Tomas Havranek on the “Rose Effect and the Euro: the magic is gone”) concludes that the sum result on trade of the common Euro currency has been negligible. Oops.

      As to not seeing the cheap credit deal coming, maybe so, but when (as your rightly argue) you move from economic to political decisions, and overnight the countries joining the Euro lose control of one of their key economic tools – meaning monetary policy – then it’s going to start going wrong, and in this case, very wrong. Greece was forced to take onboard the low interest rates set by Frankfurt, which evidently suited Germany more than it did Greece (hands up who’s surprised by that one!). This remains the fundamental flaw in the Euro (controlling your economy is tough enough, but when you’ve only got a fiscal policy left to play with, and the money’s printed elsewhere, it clearly doesn’t work).

      Besides, Europeans could just have easily adopted the US Dollar as invent a new currency al of their own. But that would have meant ceding control of monetary policy to Washington, and who would want that? I’m sure there are even some states in the US who’d rather do it themselves too! But if you wouldn’t want to cede control to Washington, why is Frankfurt any better?

  2. Interesting, but I thought ”trade” was the main clincher for the Euro. Nations in Europe are small, too small to have a currency of their own. Sweden is smaller than Chicago. Denmark and Norway are both smaller than Miami. Try to imagine an America where major cities have their own individual currency. Currencies that floated independently of each other and of the Euro, with its own interest rate, political targets etc. Some cities would benefit from this, surely, but certainly not the US a whole.

    Before the Euro, it was almost like that in Eurozone… and when currencies were set free to float, they went yo-yo-ing all over the place. At that time it seemed logical to dump the Lire, the danish Krona et al and just use a ”dollar” like the Americans did.

    A problem with this solution however (and business people have been aware of this since day one) is that certain market dynamics will no longer be in play. If you have the same conditions for nations with very different qualifications there will be problem. A successful (export) nation like Germany will not (and is not) affected efficiently by interest- and revaluation dynamics. Had Germany still used the D-mark, it would have been revaluated a long time ago, cooling down exports… and at the same, had Greece still used drachmae, it would have been devalued, giving them a chance to improve export (i.e. according to the same fundamentals prices and salaries in Greece and Italy should be cut to ?% in order for them to be competitive). Not easy to solve, but actually a mirror of how things works in the States… Some states earn money, others just waste them. Maybe we should go federal.

    • My second “interesting but” comment! 🙂

      Yes, you are right Kristian (as was Steve above) that I missed the whole “more trade” thing. But as I argued with Steve above, that didn’t pan out either.

      You’ve hit the nail on the head though: losing monetary control and only having your fiscal cards left to play with simply doesn’t work for countries as diverse as those in the Eurozone.

      Perhaps even the different states in the US might benefit from having their own currencies. Does California really benefit from having the same currency as New York State, both of which are controlled by Washington? I’m not arguing for private currencies here, but being able to change your monetary policy a little when things get hot might be of benefit to states as much for countries.

      In short: I don’t think having a common currency is a necessary condition of federalism.

      • The whole ”Euro” project is to some extent a ”socialist” venture. Either you like that or not. The goal is to distribute welfare throughout Europe, to lift the periphery. Not of kindness, but to create long term prosperity, safety and stability for the entire region. Same goes for the USA. If you just leave Misissippi and Romania and other poor states/countries to their fate you will soon have the entire region unstable.
        What is needed in Europe is a better finacial leadership structure (Anders Borg as CEO) + some new financial tools… The north’s (Germany’s) booming productivity must lead to some kind of revaluation of its currency. This is key. This would make them less competitive. Just throwing out Greece will not fix this obvious problem… Neither will nagging about the debts of the south. There will be another country in line when Greece is gone. A more clever solution (popular amongst my German friends) would actually be a German exit from the Euro. Germany can then revalue its currency – which would minimize effects of a ”south” bankruptcy – and then save the Euroregion from outside.
        Check this article for more on this ”Germany’s strength is the key problem theory”…

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