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How the Euro is Doomed 28 May 2006

Posted by David in Europe, Formal Works.
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The Euro, the final result of years of currency market intervention tantamount to market rigging, restrictive economic practices and visionary dogma, was introduced in 2002. Its effects have been as predicted, though most Eurozone nationals have found it a harsh wake up call, and its many symptoms and side-effects will only become more evident as the malaise of restrictive practices takes control further.

With its introduction, the 12 Eurozone members handed their economic independence to the newly created European Central Bank. But it is not the lost sovereignty that bites back, but what the sovereignty was, is and will continue to be used for. The ECB, now a major financial institution and accountable to no-one, controls the interest rates and monetary policy of the Eurozone. Along with this, the ECB necessarily also sets limits on spending, thus controlling fiscal policy as well.

The Euro is a conquest of sovereignty. It gives us a margin of manoeuvre. It's a tool to help us master globalisation and help us resist irrational shifts in the market – Dominique Strauss-Kahn, French Finance Minister, The Daily Telegraph, 1st January 1999.

And the main effect of this loss of sovereignty has been a total loss of flexibility, what they wrongly call "irrational shifts in the market". Whereas each national currency once moved freely on currency markets, based on that nations economic situation, all are now combined into the single currency. The Euro now moves for the Eurozone wide situation, an average situation that no nation may actually have. This is also true for interest rates, set by the ECB for the Eurozone average, not what each nation actually needs. A study by the University of Liverpool showed that no single Eurozone nation suited the ECB interest rate, with many such as Germany over 1% out.

Lacking the flexibility on interest rates and currency valuation, each Eurozone nation has its own unique problems. To worsen the situation, global changes don’t affect the Eurozone symmetrically; some areas will be hit harder than others. With no national level flexibility, there is no way out. A nations currency value and interest rates are a safety valve for problems, if control is lost, the results are felt elsewhere; unemployment, inflation or deflation, boom or bust economies, deep lengthy recession and no escape.

The current account balances of France and Italy continue to worsen. France has gone from a deficit of $8.4bn in 2004 to almost $39bn last year, while Italy’s deficit has worsened from $15bn to $36.5bn. Spain’s deficit is $83bn ($55bn). Germany, by contrast, has seen a strengthening of its current account surplus. If this is convergence, it is not as we know it – The Business Newspaper, 28 May 2006 

Growth is destroyed by the inflexibility; just 2.4% projected for 2006, compared to 4.8% in America. Some look to America as a model for the Eurozone, but the reality would be harsh, the US Federal Reserve has to focus on the big wealthy states such as New York and California as these are most productive. The ECB may be forced to do the same, trapping poorer Eurozone states as the EU answer to Kansas. The areas are simply too large to converge to equally high standards.

During change over shop keepers took advantage of the switch and ‘favourably converted’ prices in their own interest, triggering inflation. The inflation lead to wage inflation, leading to further price increases. A cycle of inflation is thus triggered through expectation. Lack of flexibility makes tackling it hard, as only solutions involving spending cuts and tax remain open. The inflation makes the country less competitive, further slowing growth and costing jobs.

From the extent of our country, its diversified interests, different pursuits, and different habits, it is too obvious for argument that a single consolidated Government would be wholly inadequate to watch over and protect its interests; and every friend of our free institutions should be always prepared to maintain unimpaired and in full vigor the rights and sovereignty of the States and to confine the action of the General Government strictly to the sphere of its appropriate duties – Andrew Jackson, A Political Testament, 1837

In addition to poor growth, unemployment and worsened economies, spending of Eurozone member states is restricted to maintain Eurozone balance. In times of crisis, such as in Italy now, or Spain where ‘bust’ is predicted, or Greece where inflation is running away, cuts to public spending and services, and/or tax changes, are necessary.

For all the hype of greater wealth, the Eurozone has failed to deliver. International companies do not trust the currency, leading to much investment in Britain. Foreign reserves have not rushed to stockpile Euro bonds, lest not Italian ones where a higher yield accounts for the risk of collapse, and the Dollar remains the World’s favoured currency except among anti-Americans. There is some minor increase on Eurozone-Eurozone trade, mostly consumers buying shopping, although this is very small and balanced, causing very little in the way of shifts in wealth, trade or prices.

The one effect that has occurred as the EU hoped is increased stabilisation compared to other currencies. This however is artificial stabilisation through the currency following Eurozone average figures, which suits no-one, certainly not the Eurozone member states, as none match the figures exactly. As the Eurozone economy worsens, the exchange rate will move anyway. Currencies move for a reason, merging currencies for stability is like strapping yourself to the Titanic for fear of icebergs.

Furthermore, ideas that economic integration would lead to political integration proved wrong, and the EU project has stalled. The Euro is predicted to die a slow death over 10-20 years by Paul De Grauwe, an economist whose work was used to make the case for the single currency.

Italy, Spain, Portugal and The Netherlands…are now powerless to restore their competitiveness without introducing outright deflation, and large increases in unemployment. A political union is the logical end-point of a currency union. If political union fails to materialise, then in the long term the euro area cannot continue to exist. Now that nobody appears to want that political union, you can begin to wonder whether monetary union was such a good idea. Political unification has failed. But that is a big problem for the currency union. That is in danger. The effects of this will take time, he said. In the longer term, the monetary union will collapse … not next year, but on a time frame of 10 or 20 years. There is not a single monetary union which survived without political union. They have all collapsed. Sometimes I wonder: do we still need the European Union? I start to have doubts about that. It is sufficient that countries open up their economy. You don’t need to do that in the context of the European Union – Paul De Grauwe, a Eurozone founding economist

The Euros main effect has been to worsen the European economy through lack of flexibility, dynamism and freedom. The rigid Europe-wide “one size fits all” idea has proven an abject failure; “the Euro has been a disaster” (Silvio Berlesconi, 2005). What has been gained in stability has been lost ten times over in inflation, unemployment and stagnation. While the global economy has marched on, the Eurozone has been on the brink of recession since the Euros creation.

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Comments»

1. Darrell - 28 May 2006

It seems to me that the European leadership has not yet recognized the effects of the massive population shifts of Eastern European people and Middle Eastern people into Western Europe; these people have a different political viewpoint than that of Western Europeans.

European political union is the only recourse that is available to answer the political challenge of this new population.

I just pray that this challenge is inspired by nonviolence principals.

2. davidbkent - 28 May 2006

Darrell: Political union would simply worsen the situation if, as you say, Eastern Europeans and Middle Eastern people have a different mindset to Western Europeans. Democracy is a game of winners and losers; not all can have their own way. This requires a single ‘demos’ or ‘people’; that is a collective of people who all see each other as belonging to the same cultural/national unit. If this is not the case, the losers will always blame the majority of others, seeing them as sepperate or foreign and ultimately call for succession. Recently, for example, Montenegro has left Serbia, they did not accept majority Serb rule. The former Yugoslavia, a political union, has now entirely broken up.

It would be like merging Canada and the USA; Canada wouldn’t ever accept the US majority since they feel a sepperate, distinct group. If the moving populations are so different, it could end up more like India and Pakistan. Playing with nations and democracy is far too dangerous, all but a few political unions have ended in violence or disaster.

With immigration, the new populations mostly assimilate into the existing population over time, so it remains a single ‘demos’. The problems are when this doesn’t happen- i.e. Bradford, New Orleans etc. But this is always a minority, and people on a whole don’t generally feel their government is under the control of people not integrated or feeling the same as them – because it isn’t.

3. Lincoln - 11 May 2007

The Euro is designed to fail. When it does, with catastrophic results for normal working people, millions of Europeans will throw up their arms and cry who “will save us from this economic disaster” and the EU will finally get what it has always wanted from the start. Complete control over everything! National governments will be disbanded and the EU will use the network of local government that it is setting up right now (regional assemblies in the UK) to control each and every one of us. Goodbye EU, hello EU-SSR.

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