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Wednesday, 21 January 2015

Is the Euro indeed ‘dead in the water’, as some pundits claim? Or is an escape from the current political maze again possible for the European Union and the Euro-zone?!

I only want to make these things last,
So how could this have gone so fast?
And now you're leaving...

The decision within the European Union to deploy the Euro in 1999 – as deposit money – and in 2002 – as the official single currency– has been a controversial one, in the eyes of many people and some pundits of high repute.

One of the most-heard objections from the adversaries against this pan-European currency (unfortunately often in hindsight), was the political and financial quicksand on which it was built.

There was no political union within the EU, with a stable administration that stood above all individual countries and had sufficient executive power, with respect to the political and financial management of the Eurozone. And there was neither a monetary union, with rock-solid, automated rules and controls in place, in order to maintain the financial stability of the currency union.
There was not even a banking union, as a minimum warrant for the required stability.

The only unified control instrument, with respect to the Euro, was the European Central Bank, which – in combination with the central banks of the individual Euro-zone member states – issued the banknotes and controlled the money supply in the whole Euro-zone and thus maintained the stability of the currency. In the first years of its existence, this seemed to work fine for the Euro anyway.

After a cautious start in 2002, with a value of €1 per $0.89, the value of the Euro increased over the years and hovered between €1 per $1.20 (November 2005) and $1.60 (July, 2008). The Euro seemed a rock-solid example of European cooperation and many companies and people were enjoying the big advantages of this unified currency for trade, business, distribution and tourism purposes.

The development of the Euro vs USD
exchange rate during the last ten years
Chart courtesy of:
Click to enlarge
The positive vibe about the Euro started to change when the credit crisis gained momentum in Europe. Between July and November 2008, the Euro made a sharp downfall to roughly $1.22, although it quickly recovered when the credit crisis seemed reasonably under control in Europe, after just a few containable local crises.

However, from 2010 on, the financial crisis (then called: Euro-crisis) in Europe really came on everybody’s retina, when Greece was exposed as a genuine European problem child, with enormous budget problems and a state debt that seemed hardly maintainable for the future. 

Other peripheral countries, like Portugal, Italy, Ireland and Spain all had their own issues, with either huge budget deficits, soaring unemployment, enormous financial setbacks, due to strong economic headwinds or a state (national) debt that could hardly be contained: the PIIGS were born as a moniker for everything that was wrong about Europe and the Euro.
A few countries within these PIIGS-countries ran even a considerable risk of defaulting, if nothing dramatically would happen. At the same time the European governance model suddenly seemed extremely viscous, indecisive and overly bureaucratic.  

The official regulations that were in place within the EU, like for instance the Stability and Growth Pact (SGP), often had a quite arbitrary foundation.
This meant that boundaries and thresholds – for the SGP this were the 3% budget deficit and the state debt < 60% of Gross Domestic Product – were rather the result of a political negotiating and decision-making process than of sound scientific / economic foundations.
Besides that, while the Euro regulations were initially persevered quite strictly for the small euro-zone countries, the large countries Germany and France used a fair amount of jawboning in order to avoid heavy penalties for repeatedly breaking the rules of the SGP. 
And to make things worse; while the currency itself was a common currency for almost the whole union, political and most financial decision-making lay in the hands of the individual countries of the EU (i.e. through the European Council as highest decision-making board), opening the floodgates for endless quarreling and severe conflicts, as well as a virtual monopoly for Germany and France, with respect to decision-making about the Euro. 

The peripheral Euro-countries were begging for help and a certain amount of economic ‘looseness’, regarding the exceptional circumstances of this huge financial/economic crisis, while the stronger North-European countries (read: Germany, Finland and The Netherlands) banged the drum in favour of a strict application of the Euro-zone rules and measures.  

These financially sound countries dragged their feet and were extremely reluctant to financially aid the peripheral countries with solving their ‘own, self-created financial mess’, even though they had played a substantial role in creating this mess in the first place. 

On top of that, the United Kingdom acted as a massive ‘jamming station’, with respect to the decision-making process within the European Union.
The UK showed a hardly disguised and steadily growing Euro-sceptism and straight-forward hostility against the European Union as a communal institute. By doing so, the country ‘blackmailed’ the other European countries , in order to get special treatments and financial rulings for the London City, as economic motor of the country: “If the European Council cannot give us what we want, we might be forced to leave the European Union…” 

At that time, it seemed that envy, selfishness and perhaps even anger and gloating ruled within the European Union. Every small step ahead seemed the result of endless quarreling between the EU member states and was seemingly based upon half-baked compromises, that were only there ‘for the stage’. Everybody was busy with his own business, instead of looking at the mutual interests of the Eurozone as a whole.  

In other words, the Euro seemed to be exposed as emperor-without-clothes, while the European Union acted like a bunch of frogs in a wheelbarrow: all jumping in different directions. In spite of this all, the European Union managed anyway to contain the Greek crises and the problems with the other PIIGS-countries, albeit by a whisker.  

The first (Greek) crisis, starting in 2010, could be contained with some political and financial wizardry from all European parties involved, while the second, much broader crisis in 2012 could eventually be contained with the famous words of rookie ECB-president Mario Draghi, that “within his power, he would do whatever it took to rescue the Euro”. That was sufficient for a while… 

All negatively biased Anglo-Saxon pundits and Euro-permabears had to shut up for a few years and the financial markets somehow refound their confidence in the Euro and the Euro-zone. At least, until now… 

After the famous words of Draghi, the government leaders in the European Council shared a misplaced feeling that their job was done, with respect to rescuing the Euro, and that they could return to business-as-usual.
This meant in practice that the necessary reinforcement of the shaky foundation under the Euro – the creation of a banking union, a monetary union and eventually a political union, – became less prioritized again.  
This counter-intuitive  development for the Euro was mainly the consequence of the ubiquitous emergence of right-wing and left-wing, populist parties in Europe. Parties, which were all in favour of less Europe, less Schengen, less immigrants, less EU interference with national politics, less Euro-zone and last-but-not-least less Euro:
  • Front National (France);
  • UKIP (UK);
  • Alternative für Deutschland (Germany);
  • PVV (The Netherlands);
  • Vlaams Belang (Belgium);
  • True Finns (Finland);
  • Lega Nord and Five Star-movement (Italy);
  • Golden Dawn and Syriza (Greece)
and dozens more birds of the same feather.

The Euro and a further unification of the European Union were the main scapegoats of these populist parties, as they were presented as “technocrat inventions of corpocratia”, which were deployed without a proper consulting of the European population.
These populist parties made a possible Greek exit from the Euro-zone look like a walk-in-the-park and a politically inevitable fact, instead of a difficult and highly dangerous process with an uncertain outcome, that should – if ever – be executed very cautiously.  

And now, with the political and financial situation in Greece seemingly more unstable than ever – only days before the elections, in which the left-wing, populist ‘Syriza’ party seems a dead-cert winner – and with Italy as a second financial bungler, the future of the Euro and the Euro-zone is back on everybody’s retina. And so are the Euro-permabears and negatively biased Anglo-Saxon pundits.  

Again, the sheer future of the Euro seems on the line.

One of the best articles to this respect, was an Op-Ed in the Huffington Post, written by Joseph Zammit-Lucia, executive director of the Center for Development Economics. Very subtle, he called the Euro “the most socially destructive political act since WWII”.  

Here are the pertinent snips of his article:

[…], the pessimists will focus on the ongoing and seemingly intractable stagnation in the Eurozone and the looming of another potential Euro crisis as Greece heads towards another election with uncertain results.

There now seems little doubt that the introduction of the Euro in its current, half-baked form has been the most socially destructive European policy decision since World War II. The introduction of the Euro has led to the following chain of events: an initial period of inflation as traders took advantage of prices being changed to the new currency; a fake "wealth bubble" during a period of seeming prosperity driven by loose (some would argue irresponsible) credit in countries for which the adoption of the Euro provided artificially low interest rates; the inevitable crash which has caused untold social destruction in many countries; a German-driven obsession with austerity which has gone way beyond its usefulness and has left Greece and others buried under a mountain of unpayable debt, and the Eurozone languishing in stagnation and probable deflation. It is no wonder that Matteo Salvini, Italy's second most popular politician, calls the Euro a "criminal currency."

The economic dangers associated with the introduction of the Euro were predictable - and indeed predicted by many. Yet political leaders at the time chose to make a grand and hubristic political statement irrespective of the devastation it could bring to their citizens. The Euro is, maybe, the best example of the consequences of a political and policy elite living in their own world and totally divorced from the consequences of their actions on ordinary people.

The logical response is the "orderly" dismantling, or at least shrinkage, of the Euro.." Yet European leaders have decided that their efforts should be directed at saving the Euro - whatever it takes - to use Mr Draghi's most famous utterance. Even, it seems, if what it takes is social devastation across the Eurozone and the ruin of millions of people's lives.

As we enter 2015, Europe finds itself between the devil and the deep blue sea. On one side is the Euro - the devil that we are wedded to, that will continue to keep the Eurozone economy in stagnation, and that will continue to limit the flexibility that individual countries need if they are to re-build their economies. On the other side lies the unknown - meaningful reform of the Euro and the European Union as a whole.

This was definitely a must-read article and I agree with most statements that Joe Zammit made with respect to the Euro, as Murphy’s Law seems too much involved in the creation and maturing of the Euro: everything that could go wrong, did indeed go wrong and much more will go wrong in the future too.

Still, I am not so pessimistic about the Euro as Joe Zammit.

I have an unfounded, but strong believe in the strenght of the European Union and the Euro-zone, that everything will more or less turn out fine, in the end.
Europe seldomly takes all the necessary actions at exactly the right time, but it has a reputation for always ‘stumbling into the right direction eventually’.

In the end, political conscience and street-smartness mostly prevent the members of the European Council from making irrevocable blunders and escalating the political situation in the EU.

The European citizens on their behalf, in the end often rather choose for the ‘two steps forward, one step back’ approach of the moderate political parties, than the gung ho, kamikaze approach of the populists. During the last 75 years, Europe has been the continent of the slow steps forward, instead of the giant leaps.

The European Union and the Euro-zone are often agonizingly slow in their decision-making process and on various situations the political process seems dead in the water, but somehow they always survive.

Let’s hope it that it happens again, with "all hands on board" of the Euro ship, but be prepared for a very long political process and a substantial period of stagnation, high unemployment and very moderate growth.
Almost everything goes, but nothing goes easy in Europe!

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