For going on three years the conventional wisdom has been that the existence of the Euro is under threat. The end of the common currency has been ceaselessly predicted from many corners, particularly in the Anglo-American media and also in the blogosphere. This post will show that these expectations are way off the mark. An array of economic and political factors will be evinced to show that the survival of the Euro, while not absolutely certain, is overwhelmingly probable.
- The Eurozone’s trade with the rest of the world is relatively balanced. Compare this with the chronic foreign trade deficits of the US and the UK. Of course there are great imbalances within the Eurozone, but there is no reason why these should have any implications either for the existence of the Euro or as regards whether a particular country wishes to remain within the zone or to exit. After all, there are many regions within both the USA and the UK, which for many decades have been relatively economically depressed compared to other regions. Has anyone ever suggested that say West Virginia or Merseyside should secede from their respective currency blocks and adopt their own devalued currencies in order to regain competitiveness? Of course not.
- The costs of any particular country, say Greece, exiting the Euro are almost certainly higher than staying in. Were Greece to do this and adopt a new Drachma, the new currency would have zero credibility internationally. Under these circumstances it would be easy to see Greece devolving into hyperinflationary chaos. As severe as the present situation in that country is, such a course of action would be to jump from the frying pan into the fire.
- The ECB enjoys greater credibility than either the US Fed or the Bank of England. Since the onset of the global financial crisis in 2007 it has been more conservative than its two counterparts. Nothing like the extensive quantitative easing taking place in the Anglo-Saxon countries has been countenanced in the Eurozone. The old story about two friends running away from a bear is applicable here. Neither of the two can outrun the bear, however the survival of one of the two is guaranteed by simply outrunning the other. In an analogous fashion the Euro does not have to be perfect to survive, simply better managed than its only international rival – the US Dollar.
- This credibility is partly the result of the ECB’s distance from the nation-state. The first President of the ECB, Wim Duisenberg, said that the Euro was the first currency to have severed its links to both the nation-state and to gold. This doesn’t mean that politicians don’t try to get up to their usual shenanigans by exercising pressure on the ECB. It does mean that not only does the ECB have greater institutional distance from the various governments in the Eurozone than do the central banks of the US, the UK or Japan from their governments, but also that because the Eurozone has a number of governments, and not just one, it is difficult for these governments to put united pressure on the ECB as they are usually divided amongst themselves.
- Political will. The Euro-Project was conceived over a period of decades and given the highest priority as a means of escaping from the financial hegemony of the US Dollar. With the US fiscal situation as bleak as it is – trillion-dollar deficits as far as the eye can see -European leaders only need to keep kicking the can down the road until the dollar cracks. The possibility that European leaders will abandon the Euro just before it reveals it’s greatest utility is small.
- One should also not underestimate the extent to which the ‘Euro-Crisis’ serves the aims of the European policy elite. The forces of global wage arbitrage together with demography are rendering the European welfare-state model unworkable. The crisis provides cover for the reduction of real wages and welfare benefits. It is extremely difficult for politicians who wish to be re-elected, to sell these measures even with the ‘Euro-Crisis’. Without the crisis it would be impossible. The crisis also allows the EU more latitude to implement measures which further the cause of greater European integration.
- The effect of popular discontent in Europe is overestimated. There has of course been plenty of protest in Greece, Spain and Portugal. It is unfocused however, offers no realistic policy alternatives and is fractured among parties of the left and right. Protest has, thus far, hardly impacted policy. The ruling political groups in the various countries, act in fact as EU representatives in their countries. Among the protest groups – SYRIZA in Greece for example – there is very little opposition to the Euro as such.
What then is this crisis about if not the survival of the Euro? This will be the topic of a future post.