This essay originally appeared in the first issue of “TLQ - The Digital Magazine For Thought Leaders” in September. After I finished the piece in late August, Mario Draghi announced the ECB’s OMT bond buying programme, anti-Euro parties got a beating in the Dutch general elections and the German constitutional court approved the European rescue fund ESM. I think that all of this makes my point even stronger.
- Uncertainty is the only certainty in the eurozone at the moment. Nevertheless, it would be a fallacy to write off the Euro. The single currency is in dire straits, but it is not doomed to fail in its entirety even if the dreaded Grexit happens (I still don’t think it will.)
Whatever happens to Greece, however, the complete disintegration of the monetary union is not on the cards. Quite on the contrary, you should expect the Continent to emerge stronger and more competitive from the current turmoil.
The currency area is in a situation that is comparable to Germany immediately after the turn of the century.
Remember those days when Germany was widely described as ‘the sick man’ of Europe with greedy unions, ossified labour markets and cowardly politicians unable to push through necessary structural reforms? After a lot of dithering, chancellor Schröder, a social democrat, reformed the welfare system. In those days, his policy was seen as a modest first step on a long journey. Yet, it was sufficient to turn around Europe’s biggest economy within less than five years.
The same thing is happening in the eurozone right now. First of all, as Germany in 2002, the currency area is not fundamentally in such bad shape as most people currently believe. For the whole eurozone, the level of public debt is lower than in the United States, Great Britain and Japan. Spain’s debt-to-GDP level is lower than Germany’s, and Italy has been making primary surpluses for years.
The northern members like Germany, the Netherlands and Austria are among the most internationally competitive economies. Stricken countries like Spain and Italy are seriously pursuing radical structural reforms that will foster their medium term growth prospects.
To the careful observer, a degree of progress is apparent; most notably, the current account deficits of most peripheral countries have come down significantly in the last quarters. “Yes, they can!” Deutsche Bank economists recently wrote, with regard to this adjustment process. “Quite some progress is already there in the peripherals”, they pointed out. “This suggests the ‘doomsday view’ of the peripherals, seen as unable to rebalance their external position after years of competitiveness loss, is not validated by facts.”
Of course the Euro suffers from some major design flaws. Crucially, however, governments have started to address them. In December 2011, eurozone governments agreed on a new, ambitious “fiscal compact” which will help to curb the build-up of excessive public debt in the future. Even more importantly, in June 2012, the governments also agreed to embark on a banking union.
While a joint and comprehensive supervision of the financial sector is still in its infancy, you should avoid getting fooled by the status quo. Europe moves slowly, but if it has started to move, it is unstoppable. Eventually, tough banking supervision, if not capsized by national interests, will help to create a sounder and stronger financial sector.
Counting on the returns from an economic life insurance policy for the Euro is the counterfactual: It is much cheaper to save the Euro than to get rid of it. If the currency area fell apart, the economic costs would be just as prohibitive.
The European banking system would be wiped out, and the economic fallout would make the aftermath of the Lehman crisis look like a walk in the park. It would be “Lehman On Steroids”, as former US Treasury Secretary Larry Summers pointed out. Unemployment would explode, world trade would collapse and deflation would be rampant.
To make matters worse, compared to the aftermath of the Lehman collapse, the firepower of central banks, as well as governments, has diminished. Historically low interest rates and strained government budgets mean that there is much less room to manoeuvre to contain the damage. A disorderly disintegration of the Euro can easily trigger a second Great Depression.
There is just no orderly way to get rid of the Euro. As the economic laureate Joseph Stiglitz asserts, “It is very hard to unscramble eggs”.
There is a significant risk that a Greek exit can start a death spiral that will lead to the worst case scenario. This is why Europe has bailed out Greece twice despite the non-bailout clause, and the fact that the country cheated itself into the Euro zone. Angela Merkel could become a domestic hero in Germany if she openly tried to push Greece out of the currency area. Fortunately, she won’t take that risk.
The reason she is not tempted is that there are strong political arguments in favour of the survival of the eurozone. Right from its start, the single currency was a political project rather than an economic one, meant to trigger closer political integration in Europe. With the benefit of hindsight, this might have been a misguided approach.
Nevertheless it is widely appreciated in Germany and other core European countries that the end of the Euro might also be the end of a European integration which brought decades of peace and prosperity to the Continent. I sense that European politicians and voters are aware of this and will save the Euro for the sake of Europe.
How does this square with the fact that since 2009, European leaders have been dithering and unable to bite the bullet? Well, because it’s Europe. Bickering and endless discussions are ingrained into the DNA of the Continent. But don’t forget that the will to find a compromise, ultimately, is also engrained in Europe’s genetic makeup.
Holger Schmieding of Berenberg Bank likes to compare eurozone countries to members of a family. “They quarrel. But they also help each other.” Don’t underestimate this. And don’t forget another important lesson of European history: Europe is usually at its best in the eleventh hour.
The entire issue of “TLQ - The Digital Magazine For Thought Leaders” can be downloaded on the App Store. The first issue. published in September, deals with the future of capitalism, among the authers are Lord Browne, Jim O’Neill and Vint Cerf.