Saturday, 31 December 2011

Der Spiegel: The Delusions of the euro-zone

"The Lies that Europe's Politicians Tell Themselves" is the apt title of Armin Mahler´s Der Spiegel article about what Angela Merkel and the other leading European politicians have been doing in the wake of the euro-zone crisis.

Almost all the leading political figures in Europe, including e.g. former German chancellor Helmut Schmidt, current chancellor Merkel, the head of the Euro Group Jean-Claude Juncker, have repeatedly stressed that there is no crisis of the euro, only a debt crisis in some of the euro-zone countries:

If it were only that simple. Unfortunately, it isn't. Simply put, without a common currency, Greece's problems wouldn't have spilled over into Spain and Italy. And, without this risk of contagion, politicians and central bankers wouldn't be staggering from one crisis summit to the next, ever driven by the fear that the currency union might break apart.
Without the euro, Greece could recover more easily. It could devalue its currency and thereby make its national economy competitive once again.
Indeed, without the euro, Greece wouldn't have ever gotten into this calamitous situation in the first place. The fact that it was a member of the currency union was the only thing that allowed the country to borrow money at such favorable rates and get itself up to the neck in debt.

Nevertheless, not one of the currency union's founding fathers will admit that it was poorly designed. The currency union brought together countries that weren't compatible economically simply because it was opportune politically. It replaced the currency exchange rate, the standard mechanism for balancing out differences between national economies, with the principle of hope. Now, the common currency was supposed to make the economies align themselves with each other, practically automatically.
In reality, however, the differences between the economies of the euro-zone countries became larger rather than smaller. The so-called "Club Med" countries benefited from the low common interest rate. They lived beyond their means and they consumed more than they could afford -- to the detriment of their already weak ability to compete.

The lies and delusions of the failed European leaders will according to Mahler in the end lead to this:

In the end, the currency union will shrink. Greece and possibly even other countries will have to abandon the euro in order to be able to get back on their feet with the help of their own, significantly devalued, currency.
The euro saviors and their citizens must finally face the uncomfortable truth. Under current conditions, the euro will fail economically because the differences between euro-zone countries are too great.
But new conditions that would give the euro a firm economic foundation are almost impossible to implement due to political factors. In any case, they can definitely not be put in place quickly enough to combat the current crisis.
Indeed, the would-be euro saviors are suffering from yet another delusion: that they are able to buy all the time they need, without any limits.

Read the entire article here


Merkel, Sarkozy and the others are obviously hoping to be able to postpone the crucial decisions until after they have left the scene, but that hope may be another delusion.

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