They can’t say they weren’t warned. Any number of economists lined up before the euro was launched to predict how it would strangle economic growth. And it has...
When Britain’s parliamentary parties, the CBI, the TUC and most of the media were pushing us to join the euro, some begged to differ. In 1996 the United Nations Conference on Trade and Development forecast that there would be zero economic growth under European Monetary Union.
The economist Susan Strange forecast in 1998, “it could very well be that German monetary hegemony in the EU will doom European economies to prolonged slow growth, high unemployment and low competitiveness.”
Doomed currency: leaving the euro is the best policy tool to create growth.
So long as the euro exists, most members will have the wrong monetary policy. Like the gold standard, the euro forces changes in real prices and wages instead of exchange rates. And, like the gold standard, it pushes economies into slump and puts the pain of adjustment on weaker countries. Inside the euro, profits, dividends, bonuses, mergers, unemployment and emigration all rise; wages, living standards and investment fall.
The attempt to regain competitiveness and work down the debt burden through misnamed austerity – in reality, impoverishment – is bound to fail. Cutting public deficits cuts demand both at home and in other eurozone countries. Countries pedal ever harder to stay put. Cutting wages and prices increases the real value of debt, thereby further weakening the banks.
The EU calls for more poverty, yet public and private sectors can only decrease the percentage of debt on their balance sheets by creating large current account surpluses – not possible given most eurozone members’ huge external debts and low exports. The current account deficits of Portugal, Ireland, Greece and Spain have been far worse since they joined the euro, and have worsened every year since. Their total net external debt is far more than any seen during the 1997 Asian crisis.
Breakdown and collapse
When investors expect debts to rise forever, borrowing costs soar, and the face value of debt collapses. This breakdown in confidence and collapse in debt value happens very quickly, as with Greece and Spain. Greece and Portugal are insolvent and will never be able to pay back their debts, while Spain and Italy are “illiquid” – can't get hold of cash – and cannot meet their upcoming debt payments.
To fund their current account deficits, they have sold more assets to foreigners than they bought. For Portugal, Greece, Ireland and Spain, foreigners now own assets worth almost all their GDP. If countries default or leave the euro, the creditors will be French, German and British banks. EU members have a total exposure of £552 billion to the Greek economy. That exposure has just forced Cyprus into a bailout.
The European Central Bank is also now very vulnerable. It has a small capital base – 6.4 billion euros, which will rise to 10.7 billion euros by the end of 2012. But its last reported accounts showed liabilities of 163 billion euros. So the European Central Bank may already be insolvent. It is creditor to many fragile banks in the Eurozone, to the tune of about 850 billion euros. European banks are undercapitalised and insolvent, with uncontrolled exposure to risky sovereign bonds. Bank runs are already happening.
The euro is doomed. In the summer of 1993 a speculative attack ended the ERM experiment. The lesson (as of the 1971–73 collapse of the Bretton Woods system of fixed foreign exchange rates) is that if markets believe, with evidence, that they can break exchange rate systems, then they will.
Defaults, debt rescheduling and devaluations are inevitable and desirable. Countries should re-denominate sovereign debt in local currencies, recapitalise, restructure and shrink their banks, and force losses onto the bondholders.
During the past century, 69 countries successfully left currency areas. These countries then grew again quickly. For example, after their 1997 devaluation, Indonesia, South Korea, and Thailand suffered short, sharp downturns, but then grew quickly for the next decade and achieved pre-crisis GDP levels within two to three years.
It would be best to announce the end of the euro on the first exit. Otherwise the markets will just line up to attack the next weakest link. The single currency was based on the impossibility of exit. Once there is an exit, then the euro project is over.
And once it becomes clear that a country needs to leave the eurozone, it should do so at once. Accepting more and more bail-outs before finally leaving would cause far more damage. But the EU makes it hard for countries to leave, hurting them to try to prove that leaving is bad for them. EU treaties oblige eurozone members to have the euro as their currency, and the capital controls needed for an orderly exit are illegal under EU law.
Leaving the euro is the most powerful policy tool to create growth. In 2002 Argentina defaulted and devalued, imposing a 50 per cent loss on banking sector assets. The government drained the banks of capital (to the public’s gain) and sent the banking system into insolvency (to be rescued by the government). The world’s capitalists all screamed that its economy would crash because it would have no access to international credit or to international trade. But after just one quarter of contraction, Argentina’s economy grew by more than 8 per cent a year, led by an export boom spurred by the much lower exchange rate. ■