Cromme, Siemens CEO Peter Löscher and Daimler CEO Dieter Zetsche, promote the monetary union andinsist: "The euro is necessary." They argue that ailing member states must be assisted financially, and thatthe common currency is "absolutely worth this commitment."
The Euro Is a Fair-Weather Construct
But the causes of the euro crisis are more deep-seated than that. The monetary union is a fair-weatherconstruct, as a number of economists said from the beginning. American economist Milton Friedman, forexample, predicted that the euro would not survive its first major crisis, and later, in 2002, he added:"Euroland will collapse in five to 15 years."For these reasons, the euro crisis, as suddenly as it occurred, was expected. However, the warnings had beenignored and treated as a minor nuisance. More than anything, the euro was a political project. Its advocates,most notably then German Chancellor Helmut Kohl and then French President François Mitterrand, wanted topermanently unite the continent's core countries and embed Germany, which many neighboring countriesperceived as a threat following reunification, in the European community.Politicians hoped that as a result of the common currency, the underlying problem of the euro's design wouldresolve itself, namely that the member states would almost automatically settle in at the same pace of economic development.It was a deceptive hope. In fact, it was only interest rates that converged, now that the European CentralBank (ECB) was setting uniform rates for strong and weak members alike throughout the entire economiczone. As a result, a great deal of capital flowed to Spain and Ireland, where a real estate bubble developed,while the Greeks and the Portuguese were able to live shamelessly beyond their means. They imported morethan they exported and took on more new debt to pay for their consumption.This behavior continued unabated until the financial crisis put an end to it. Suddenly money was scarce. Thebubbles in Ireland and Spain burst, the economy in the euro zone collapsed, and the Greeks were forced toadmit that their debts were much higher than they had ever disclosed before -- and that they had falsifiedtheir numbers from the beginning and should, in fact, never have been allowed to join the monetary union inthe first place.
Has the Euro Pushed Europe
Since then, the monetary union has been on the brink of collapse. Far from growing together economically,Europe has in fact grown even further apart. As a result, the chances that the euro will survive in its currentform are slimmer than ever. Politicians who ignore the laws of economics cannot go unpunished in the longrun.If national currencies still existed, countries like Greece and Portugal could resort to a proven means of reducing their lack of competitiveness. They would simply have to devalue their drachma or their escudo, andthen the laws of supply and demand would see to it that the flow of commodities was diverted.The prices of Greek and Portuguese products would go down to make them more marketable abroad. At thesame time, money would be worth less in Athens or Lisbon, so that residents of those countries could affordto buy fewer imported goods. This would be beneficial for the trade balance. Exports would rise and so wouldthe foreign currency revenues, allowing the countries to service their debts more effectively. Not thegovernment but the markets would reduce economic imbalances.But in a monetary union, the exchange rate is no longer available as an adjustment valve. Instead, themember countries must regain their competitiveness in different ways, namely by imposing tough austeritymeasures and reducing wages and prices. In a monetary union, it is up to the governments to enforce whatthe exchange rate would do in a system of competing currencies.
If this fails, the mountain of debt will continue to grow. In the end, a country with a large deficit has threeoptions. First, it can declare itself insolvent and, after restructuring its debt, attempt to rebuild its economy.Second, it can also withdraw from the monetary union and reintroduce its national currency. Third, it canconvince the creditor countries to keep issuing new loans, thereby providing it with permanent financing.For more than a year now, European governments have been trying out a fourth option: muddling through.
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