Crisis in the eurozone
9 August 2011
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10 August 2011
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19 November 2024
It is in times like these that one appreciates the advice the Irishman gave the tourist seeking directions: ‘If I were you, I wouldn’t start from here.’
In recent days some European statesmen have been trying to ‘restore confidence’ to the financial markets by assuring everyone that they have the political will to take whatever steps are necessary to resolve this latest serious eurozone crisis. But that is precisely the trouble. It was misplaced political will that created the eurozone in the first place.
Let’s remember some recent history. The Treaty of Maastricht set out five requirements for member-states wishing to enter the euro. Greece’s entry was delayed for two years; but the other eleven countries were all allowed to enter even though only one (tiny Luxembourg) actually met all five requirements.
Then Germany insisted on the ‘Stability Pact’, with France adding ‘Growth’. But after a few years Germany and France dumped the Stability and Growth Pact when it became inconvenient. The same thing happened to the Treaty of Maastricht’s ‘no bailout’ clause.
After all that, is it any wonder that financial markets have very little confidence in eurozone leaders. You can’t trust a word they say. Only the other day, President Barroso said that the recent downgrading of Portuguese bonds was unjustified – an assertion to which nobody attaches any credence.
What should be done? The answer is: recognise reality, at long last. What exactly does that mean? First, it means several eurozone member-states immediately declaring a substantial default on their government debt: for example, Greece, Ireland, Italy, Portugal and Spain. I don’t believe any of those governments will ever pay all their existing debts in full – and I doubt if anyone else really believes it either.
Second, the eurozone must be disbanded. The logic of a single currency area is substantial fiscal transfers from some European regions to others (like those from south-east England to the UK’s periphery). But this seems impracticable on two grounds.
People in transferor regions (such as Germany) are unlikely to accept such a burden willingly; and even in the anti-democratic European Union, no national government could get away with imposing it. Moreover there is a massive moral hazard for governments in the transferee regions (such as Greece). If they are to receive continuing large subsidies anyway, why should they ever get their economic houses in order?
In recent days some European statesmen have been trying to ‘restore confidence’ to the financial markets by assuring everyone that they have the political will to take whatever steps are necessary to resolve this latest serious eurozone crisis. But that is precisely the trouble. It was misplaced political will that created the eurozone in the first place.
Let’s remember some recent history. The Treaty of Maastricht set out five requirements for member-states wishing to enter the euro. Greece’s entry was delayed for two years; but the other eleven countries were all allowed to enter even though only one (tiny Luxembourg) actually met all five requirements.
Then Germany insisted on the ‘Stability Pact’, with France adding ‘Growth’. But after a few years Germany and France dumped the Stability and Growth Pact when it became inconvenient. The same thing happened to the Treaty of Maastricht’s ‘no bailout’ clause.
After all that, is it any wonder that financial markets have very little confidence in eurozone leaders. You can’t trust a word they say. Only the other day, President Barroso said that the recent downgrading of Portuguese bonds was unjustified – an assertion to which nobody attaches any credence.
What should be done? The answer is: recognise reality, at long last. What exactly does that mean? First, it means several eurozone member-states immediately declaring a substantial default on their government debt: for example, Greece, Ireland, Italy, Portugal and Spain. I don’t believe any of those governments will ever pay all their existing debts in full – and I doubt if anyone else really believes it either.
Second, the eurozone must be disbanded. The logic of a single currency area is substantial fiscal transfers from some European regions to others (like those from south-east England to the UK’s periphery). But this seems impracticable on two grounds.
People in transferor regions (such as Germany) are unlikely to accept such a burden willingly; and even in the anti-democratic European Union, no national government could get away with imposing it. Moreover there is a massive moral hazard for governments in the transferee regions (such as Greece). If they are to receive continuing large subsidies anyway, why should they ever get their economic houses in order?
5 thoughts on “Crisis in the eurozone”
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I still think that the best solution is to re-establish the euro as a common currency (not a single currency). It would be legal tender in all eurozone countries but that would not stop competing monies (whether state money or private money) being developed. A country should issue debt in whatever currency it wishes and its debt would be a matter between the government and its creditors. This does require a change at the ECB which should not accept all euro-denominated government debt in repo operations. I also think that this is the only practical way to unwind the euro as a single currency. Any other way would cause chaos.
Philip – I think that the idea of a common currency was suggested by Britain instead at the time when the Euro was being considered. Other countries wouldn’t have it, but it always seemed more sensible to me.
I worked for a pan-European company at the time and all internal prices were quoted in ECUs – a weighed basket of all the European currencies. It worked very well.
HJ – you are right. As I mentioned in my Wall Street Journal article I was simply reviving an old idea. I think it could have many advantages. Not least, all people in all countries could still save in euro if they wished. There would also be much greater legal certainty in the transition (euro debts would still be euro debts and debtors and creditors have to get on and deal with that problem – they cannot devalue their way out of trouble). A move to a common and away from a single currency does not solve indebtedness but it clarifies the situation whereas a break up would cause huge legal uncertainty.
For the third time in one hundred years German imperial ambition has brought Europe to its knees and the world to the brink of a catastrophe. This time it has been done through anti-democratic “constitutions” and extra parliamentary “treaties”. The result has been not rubble and social devastation but political chaos and financial break down. The answer is to force Germany and France to accept the cost of the enormous and unpayable debts they have forced on other Eurozone countries.
That I am afraid is the only way the obnoxious political class in Germany and France (the same combination which ran Europe between 1941 and 1945) will ever learn the lessons of this “war”.
Rodney Atkinson
Author
Fascist Europe Rising
Would a common currency work in practice? Has it ever been tried before? One of the main reasons for the Euro was that exporters were fed up with trying to see goods to an area, where exchange rates kept changing. Would a common currency solve that problem?