Spiegel Online International writes that “in the end, only the ECB will be able to save the euro if the crisis continues to escalate.” It’s useful to examine all three of the premises contained in this statement, which was made in the context of a discussion of the current Greek default crisis, the looming Italian default crisis, and the not far behind Portuguese and Spanish default crises.
One of those premises is the assumption that the euro should be saved. Another of those assumptions, closely related to the first, is whether the euro can—or should—be saved in its present form; that is, should the current euro zone remain intact. The third assumption, closely related to the second, is that, given a truth of either of the first two, the ECB is the only means of salvation.
On the first assumption, I suggest the answer is a qualified yes, the euro in some form is worth saving. Free trade arrangements among nations are economically more efficient than trade among nations that have no such agreements among them. The benefits for each of the member nations, for all of the taxpayers involved, include the following. Free trade zones reduce the costs of the goods traded by smoothing their shipment and by reducing/eliminating costs associated with the process of trade: tariffs, for example; border delays in goods’ movement; reduction of bureaucracy and of bureaucratic costs associated with managing trade without such agreements.
A common currency is nothing more than a logical extension of this, and it carries further reductions in costs to the ultimate consumer—the businesses in the member nations and their cost of supplies and labor, and the citizens of the member nations as they go about their own business. Another cost reduction is the loss of the cost of currency conversions from one nation’s to another’s. Finally, if done right, the common currency eliminates currency speculation within the zone and the price excursions that can result from such speculation (even if the excursions are inherently short-lived).
A common currency, though, even more than a free trade zone, puts demands on achieving a commonality of mores among the nations involved. The cultural imperatives, the views of a government’s role in a nation’s economy and in the people’s lives, even the views of the purpose of a currency (national or common) must have a very great deal of overlap and agreement. If these do not exist, ultimately there will result a net flow toward some member nations and away from others; this instability means that a common currency cannot exist for long.
Additionally, a common currency stands on a very large leap of faith by all the members of the common currency zone. This faith is that agreements made among sovereign nations in the creation of the currency, and that underlie the nature of that currency and its usability, will be kept.
With the euro, neither of these conditions obtain. If we look at “northern” Europe we see a common attitude that still values smaller governments (if not as small as many Americans believe appropriate) with limited roles in lives and economies. We also see a general culture that values individual work ethic, initiative, and a degree of frugality. This tends to be the case of “eastern” Europe, as well: Poland, Estonia, and Slovakia, nations that experienced directly the failures of large government involvement are examples of this. Additionally, the memories of the failures of this large, controlling government involvement are still fresh in their minds, pushing them further in the direction of individual responsibility.
Mediterranean Europe operates from an entirely different culture, one whose work ethic seems centered on working to obtain as early a retirement as possible. This is a culture, also, that holds that government’s role is to take care of the citizens in all respects. This is a culture that sees currency, not as a store of value to be divided between current needs and desires on the one hand and future needs and desires on the other, but to be used solely for current consumption (that future being a purpose of government). Regardless of what one might think of the merits of the two different mores, they do not mix.
We’re also seeing the routine breakdown of those agreements solemnly entered into at the creation of the euro. The agreement that only stable nations, with sound economies, would be allowed to join has proven to be a chimera. Greece’s membership demonstrates that. That the signs were visible ahead of its joining is apparent in the contrast with Slovakia, which had much the same economic condition, only more so, as Greece when Slovakia began discussions to join the euro zone. The differences starkly demonstrate the visibility of those signs. Slovakia had to undergo severe “austerity” measures to get its economy and debt in order so that it could join, and the people set about to do that. The Greeks lied about their progress in making the necessary changes and presented falsified books to the EU in order to gain accession, yet those falsifications would have been readily apparent to any serious audit. And today the Greeks riot in the streets at each set of austerity measures demanded as a condition of bailout.
Italy’s political instability and its resulting inability even to think about cutting spending below revenues is another example of that broken commitment.
The member nations also were assured by the agreements that created the euro and the euro zone that their taxpayers would not be held liable for the debts of any other member. But we have two bailout packages—and a looming third—for Greece that are built explicitly in the wallets of French, German, Slovakian, Swedish, et al., taxpayers.
On the assumption that the European Central Bank is the only mechanism available to save the euro and the euro zone, this is plainly false. If ECB were to print money to pay individual national debts, there would occur explosive inflation from that enormous spike in circulating money, and this would blow up the euro. The ECB cannot be involved in this at all.
The real question the euro zone faces is whether there will be a monetary union or a stable currency. With the current composition of the euro zone, the two are mutually exclusive requirements. To save the euro, the zone must be pruned, if not divided into two separate zones, each with its own common currency. “Northern” Europe and likely eastern Europe must form their own “euro” zone, and let the Mediterranean members go their own way or form their own “mediterrano” zone. Within each zone there will exist the commonality of purpose and of culture that will give their respective common currencies a chance to survive for the long term. This, of course, elides the questions for either zone of what entity should have control over the parameters of the common currency, and of how far that control should extend.