Where is the EU heading in the short to medium term? A good percentage of the EU countries are now tied to a currency that seems to be beset with fundamental problems (and arguably, was beset with these problems from the very outset).
There’s now serious talk of the Euro being split into either two currencies, a northern and southern currency, Greece being forced out (in which case there’s financial chaos across the whole continent), or the ECB and the rest of the Eurozone’s financial machinery being much more proactive in stablising the currency. In particular, the idea of Euro-bonds being issued, where every constituent Eurozone nation guarantees every others debt (or some other similar mechanism) is being floated. This seems to be somewhat controversial amongst Northern Eurozone members, however, as for all intents and purposes these countries will then be guaranteeing the debts of the spendthrift Southern members.
A further problem with tieing the Eurozone members much more closely together is the possibility of a two-tier EU, where Eurozone members are in the driving seat and every other member, not in the currency, is being dragged along for the ride.
So, where exactly is the Euro, and by extension the EU, heading?
[ul]
[li]Are we likely to see the Euro surviving in its present state in two years time?[/li][li]Will Greece default? Is it better for everybody else that Greece is allowed to default?[/li][li]Will closer ties between the existing Eurozone members fundamentally change the makeup of the EU?[/li][/ul]
The eurozone will not exist in its current form in another three years.
The PIGS require a different monetary policy from the core countries in order to return to fiscal sustainability, but Germany won’t stand for it. The ECB is enslaved to the krauts’ inflation fears. As the Economist Free Exchange blog puts it: “If the euro zone does fall apart, a fitting epitaph might read, ‘The ECB feared 3% inflation’.” I would say 4% inflation instead, but the idea is sound. The PIGS can’t finance their deficits, they can’t print their own money, either, so we’re stuck with the mother of all bank runs sometime in the not-so-distant future. Even the relatively mild purchases by the ECB of Spanish and Italian debt has been challenged by the German government. They’ve reached the limit of possible action. The ECB has a single mandate of price stability, not a dual mandate like the US Fed has. There is zero political will in Germany to do the right thing because they’re so busy blaming other countries, when Greece was actually the only genuine bad actor. They’re so worried about “protecting” their currency that they’re losing their currency.
As for the bad actor, Greece, they will without doubt default in some form or another. They’re in the worst shape, their government having in the past deliberately published false information about their national accounts, and they also have an entirely loopy tax revenue system. They can’t support their current debt burden. Even if ECB policy were sensible, they likely wouldn’t be able to support their debt burden. The EU hasn’t helped the situation, by forcing austerity measures that negatively affect the economy, with no monetary help to alleviate the contractionary nature of such policies. Typically a country would choose an external devaluation, but that’s not (yet) an option for Greece as a member of the eurozone, and the ECB isn’t helping because they are, as mentioned, under the Germans’ thumb. Just a bloody mess.
Those two points are clear. As for any other other matter in the future of the EU, I couldn’t say anything more with any confidence.
OK, so you’re suggesting that the Euro will split into two currencies, or are we looking at the likes of Greece and Italy reinstating their old sovereign currencies again? If the former, can we speculate about which countries will fall into the Southern Euro? Just the PIGS, or some others?
I’ve already heard that there’s a slow motion bank run on Greek banks, as everybody is trying to get their Euros out before its converted to drachma, under the assumption that the Greeks are possibly going to exit. I don’t know how true this is.
The countries that break off will all get their own currencies.
The problem with the idea of a unified PIGS (or PIIGS) currency is that an end to the current eurozone is completely unthinkable as a policy until the moment after it’s already happened. If the PIGS start even whispering to themselves at night in bed of separating from the current euro zone, then the mother of all bank runs immediately begins, and they will have to declare an international bank holiday for a week (or so?) until they have some new money system in place. I cannot imagine so many countries coordinating that sort of action with each other, and coming to a consensus on a new collective currency separate from the current euro, on such a short time frame. Not to mention that any new cross-country currency could eventually have the same problems that the euro is having. Nah. They’ll go it alone after this.
Very true. It’s sometimes called a “bank walk” because it’s so gradual.
But Greece is not the only country whose banks have suffered such persistent losses of funds, just the most notable example. The whole system is feeling stress, even banks in relatively stronger countries like France. The incomparable Martin Wolf of the Financial Times gives an excellent, but very technical, explanation of the European money system here. The simple version is that they keep putting band-aids on a gunshot wound. Eventually, the patient will die. Just a matter of time at this point.
Then you haven’t read much at all, except maybe back in USA land, in English.
Of course as others point out, you have confused EU with Euro zone, which are far from being synonymous. There’s no reason for an EU collapse over Euro. Your entire comment is nothing but anti-EU ignorant bluster of the worst kind.
On where EU is heading, I think it really depends on what Germany is willing to do. If the German leadership recognize that they are going to pay one way or another (that is a Greek ‘savage default’ will trigger a massive PIIGS blowback that will blow up N. Europe banking systems and thus their system and their exports too), then maybe the scenario imagined in The Economist last week can be worked through.
I’d say there is a decent chance that an orderly default with Greece could be worked out - the arguments are there that in many ways Greece is very different than Spain or Ireland - or Italy (less different there, but fiscally quite different). A strong enough action could see that work. But one has a hard time mustering confidence that the national leaderships, Germany in particular, will be able to muster the political courage. I am pretty sure that every government signing on would then fall in the end, so one has to be ready to commit political suicide for long-term good.
BTW, Wolf had this column this past week on issues re a break-up. It is rather scary enough to hope that Eurozone MinFins are reading it closely, as well as their relevant PMs and Presidents. Both in USA and UK, the casual anti-EU blusterers should sit up and take notice, if this blows apart, we are in for a 2nd Great Depression.
I think that Germany will opt out-and restore the DMark.
Where does that leave the smaller countries (like the Netherlands, Belgium, Austria)? They cannot take on the brden of delinquent states like Greece-so the whole thing will collapse.
One strange effect of this, might be to restore currencies like the British pound and US$ to a stronger position.
Another question: as Russia drifts back to dictatorship (under “Tsar” Putin), it would seem to me, that Putin would welcome the dissolution of the ECU (it would enhance Russia’s power over european energy supplies). So can we expect Russia to promote this?
The Euro, as it is now, is and was always unworkable. It’ll be gone within 24 months.
The EU is a different entity than the monetary union, but it’s whistling past the graveyard to pretend that the death of one won’t affect the other. The monetary crisis is yielding a surge of nationalism, and that is going to have political fallout. How much remains to be seen.
It’s not a fatal blow to the European vision, but they’re going to take a step back before taking a step forward.
More than 40% of their exports - the one thing keeping the German economy going - does to Eurozone. No sane German government is going to blow up their banking and pensions systems (which are massively exposed to Eurozone debt) AND flip their largest trading partner zone into a depression (especially if you count that EU neighbours that trade massively with Germany would also flip into depression.
It would immediatley put the supposed restored Dmark into a situation like that of the Swiss Franc and further hammer the German exporters.
Russia hasn’t a fucking thing to say in this, no one of relevance or power is listening to Russian advice for fuck’s sake.
I cannot see the Eurobond idea getting through 17 parliaments. The German constitutional court has already said that it would have to be approved by the Bundestag, which by itself pretty much scuppers the idea, right?
The general argument was that the Euro would go down with the first economic crisis. Which appears to be exactly what is happening. Or are you perhaps of the opinion that the Euro was magnificently created? It’s no big deal making fantastic economic castles in the air when all the economic indicators are pointing up. Much harder to make them robust to stay afloat during downticks.
My predictions. Greece will default with a 50% haircut, but stay within the Euro. The top Euro bureaucrats will find a torturous way to bypass national legislation to push through a tighter integration and perhaps something resembling euro-bonds by another name – already the ECB has been buying national bonds. It won’t be beautiful, and it will be mostly dysfunctional. The EU resembles more that of a living evolving adapting beast, than a machine engineered with precision. But somehow we’ll stumble through. And come the economic upswing, most of the lessons will be quickly forgotten. Nothing fundamentally will change, because the EU already is a massive byzantine complex of rules, many designed to bypass the limitations set up by national legislation. Few citizens of the EU understand them, and fewer cares enough to even try.
It did. It’s rising back up now - never even fell below its lowest point ever (that was around the turn of the century) or even its second lowest point ever ('05). Right now, it’s still stronger than the dollar, by quite the comfortable margin too. No matter how you slice it, this is not a freefalling currency.
I wouldn’t worry about the Euro, nevermind the same old “the EU is going to collapse aaaaany minute now” predictions from the peanut gallery. Like you say, we’ll just truck on right on the edge of murderous insanity - as usual. Very worst case scenario, we’ll ditch Greece until such time as they get their shit together. But even that is unlikely IMO.
I’d also say that I would not be so blasé about Greece, this has a real potential to cause Euro collapse. Part of the problem is France and Germany are being too blasé but everyone now knows that just Greece alone could blow a hole in balance sheets in N. Europe, and in doing so if not controlled, can easily cause Spain and Italy to go down. Then we’re fucked.
It was created to be a long-term, stable monetary unit that would be viable in all economic climates. They spent a decade going into debt, papering over problems, and using the productive economies to cover for the unproductive ones, and the first significant recession that hit looks ready to undo it. If it fails, it will have been for exactly the reasons skeptics cited at the outset.
So yes: if it goes under, it’s going to be because the long-term plan was ill-conceived from the start.
You can build a house of cards that will stand for awhile, too. Choosing to live in it is a terrible idea.
I am not particularly well versed in the situation, but from the beginning the separation of political and economic sovereignty has struck me as an entirely unsustainable state of affairs. The only way to move forward would be for the members of the EU to give up political power (moving toward a United States of Europe). My own opinion has always been that the architects of the Euro were of the same opinion and they saw the introduction of the Euro as a way to gain leverage to make that happen (while saying all along that no one would forfeit their sovereignty).