HH The Tragedy Of The Euro

After two decades, the euro’s minders look set to drive the Eurozone into deep trouble. December was the last month of the ECB’s monthly purchases of government debt. A softening global economy will increase government deficits unexpectedly. The consequence will be a new cycle of sharply rising bond yields for the weakest Eurozone members and systemically destabilizing losses in the bond portfolios owned by Eurozone banks

The blame-game

It’s the twentieth anniversary of the euro’s existence, and far from being celebrated, it is being blamed for many, if not all of the Eurozone’s ills. 

However, the euro cannot be blamed for the monetary and policy failures of the ECB, national central banks and politicians. It is just a fiat currency, like all the others, only with a different provenance. All fiat currencies owe their function as a medium of exchange from the faith its users have in it. But unlike other currencies in their respective jurisdictions, the euro has become a talisman for monetary and economic failures in the European Union.

Recognize that, and we have a chance of understanding why the Eurozone has its troubles and why there are mounting risks of a new Eurozone systemic crisis. These troubles will not be resolved by replacing the euro with one of its founding components, or, indeed, a whole new fiat-money construct. It is here to stay because it is not in the users’ interest to ditch it.

A s is so often the case, the motivation for blaming the euro for some or all the Eurozone’s troubles is to shift responsibility from the real culprits, which are the institutions that created and manage it. This article briefly summarises the key points in the history of the euro project and notes how the mistakes of the past are being repeated without the safety-net of the ECB’s asset purchases.

The birth of the euro

To swap a number of existing currencies for a wholly new currency requires the users to accept that the purchasing powers of the old will be transferred to the new. This was not going to be a certainty, and the greatest reservations would come from the people of Germany. Germans saved, and therefore risked the security of their deposits in a new money and monetary system. They were reassured by the presence of the hard-money men in the Bundesbank, who had a mission to protect the mark’s characteristics against the weaknesses that would almost certainly be transferred into the new euro from more inflationary currencies.

These anxieties were assuaged to a degree by establishing the ECB in Frankfurt, close to the watchful eye of the Bundesbank. The other nations were sold the project as bringing greater monetary stability than offered by their individual currencies and the reduction of cross-border transaction costs. Borrowers in formally inflationary currencies also relished the prospect of lower interest rates.

It was clear at the outset that the new omnibus euro required new disciplines, and it was here that the system failed from the outset. Having sensibly set out the euro’s parameters in the Maastricht Agreement, political considerations then took over. The raison d’être of the euro, so far as the politicians were concerned, was to further the European Project and getting countries into the new Eurozone became more important than compliance with the terms. 

The terms had been set in the Maastricht Treaty in February 1992, which was signed by the twelve members of the pre-existing European Community. To qualify, membership of the euro required an inflation rate no more than 1.5% higher than the average rate of the three lowest member states, a fiscal deficit of no more than 3% at the end of the preceding fiscal year, a ratio of gross government debt to GDP of no more than 60%, membership of the exchange rate mechanism for two years without devaluation, and long-term interest rates no more than 2% higher than the inflation rates of the three lowest inflation rates.

This was sensible stuff but was then ignored by the Maastricht signatories. Only Luxembourg fully qualified for membership under the Maastricht terms.[ii]

Even the EU’s sheet-anchor, Germany, failed. Her budget deficit in 1996 was 4% of GDP. France’s was managed (manipulated?) down to 4% from 5%. Greece’s budget deficit after some very creative accounting was shown as 8%, and Italy’s must have had a papal blessing because it miraculously fell from 8% to 4%.[iii]

1 2 3 4
View single page >> |

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.