A modest proposal for saving the euro

After the first European bail-out, which did not leave much of an impact on the tragic economy of Greece, the second package is already en route to the country that is helplessly balancing on the brink of collapse. But if one forgets about tiny troubled economies of the European Union, like Portugal, Ireland and Greece, nobody would / should really care about the euro or the future of the euro zone because the collapse of these countries would not make such a big difference, the EU could move on. However, new developments in Spain and especially in Italy, one of the biggest members in the Eurogroup, reinforce the belief that without leadership and strong commitment the euro will eventually sink and the whole idea of the EU will come under question.

2011 can easily be the decisive year not just for the Italians, the Greeks, the Irish, the Portuguese and the Spanish, but for the whole Europe. We now know that smaller and economically weaker states such as Greece, Ireland and Portugal may well fall into default. But we also know and hear that while their collapse would be a serious blow to the European Union, it would still not make the euro history. Leaders of the Eurogroup and the Union know this, and in my view, that is why they are completely reluctant to get their acts together and decide about the faiths of these countries. However, Spain and Italy are playing in a different league than the states mentioned beforehand. Should these two fail to  pay off their debts, European and international markets would simply plummet. Of course, this means that the EU cannot let Spain and Italy behind with their problems!

Nonetheless, I believe that the trouble of Southern Europe provides a one-in-a-lifetime opportunity to both more disciplined member states and the rest. Firstly, countries like Germany, the Netherlands, Austria or Finland that are frustrated about helping out weaker states with their own taxpayers money could force EU counterparts to act more responsibly and more seriously with public finances. It may sound populist, but the carrot-and-stick policy (i.e. we give you money if you change the system as we, the majority, advice you to) could may well work in case of South Europe. Secondly, politicians with clear programmes in Italy, Greece, Spain, etc., who were previously either sidelined or simply did not have the appetite to take part in the shady business of current political elites can now stepin and change the faith of their respective countries. Of course, it is always easier said than done, but there is absolutely no way that there would be no capable people to live up to popular expectations. And thirdly, it will finally turn out whether the euro area is a rich country club where only financially conscious and successful states can flourish with no room for others, especially troubled ones, or a common EU-project where everything rests on solidarity and trust. In theory, it should be the latter, but in real-life, I think the first applies!

I am pretty sure that many people do not, cannot and will not agree with me on this, but still, I feel that there is no room for countries like Portugal, Greece, Ireland, Spain and Italy in the Eurogroup. There should neither be any room for anybody else who cannot comply with EU rules and regulations (oops, in that case there probably would not remain a single country in the euro area) or who cannot function responsibly when it comes to public finances. Yes, of course, this means that there would be only a handful of members in the euro zone (Germany, Austria, the Netherlands, the Scandinavians and let’s say, Luxembourg), but who cares, at least it would not be obligatory for German taxpayers to help out Greeks and also, it would not be a must for George Papandreou to follow EU demands while saving his country. Do not get me wrong, all-in-all, I think the Euro is a great achievement and a solid currency that should be used across the Union, BUT, only with care and a sound understanding of what can happen when something goes wrong, because in the end, something always goes wrong!


  1. Dear Aron A. Nemeth,
    I agree with your overall logic that any undisciplined member cannot be part of the euro (back in 1999 Belgium one of the original euro member-states had a public debt similar to that of Greece today, which exceeds by a lot the criterion set out by the Stability and Growth Pact). I also agree that the countries of the European periphery do not belong to the euro (unless their economies are fundamentally restructured).

    However I would like to point out a couple of things.

    The first is that if the single currency does not include the peripheral countries, then all exports from the surplus countries (center/north) will not be as consumable in the periphery, thus the economies of the countries that are left with the euro will not be as prosperous. The euro facilitates trade and builds upon the logic of economies of scale – the bigger the economy, the more efficient certain industries are (this is absolutely true for the exporting sectors of the surplus countries). Hence a reduction in the size of the market will translate into a diminution of the efficiency of those industries. In short the eurozone will become a less attractive area for trade even for its own members. You see, peripheral countries, apart from running deficits, are also consumers. In fact those deficits were taken up in the first place to consume the exports of the surplus countries.

    The second is that the euro is a very good currency only in times of prosperity, since it allows for unobstructed free trade among member-states, the ECB has a strict monetary policy that prevents it from heating up the economy and it is seen as a very powerful global currency that many central banks like to keep in their reserves.

    But in recessionary times, such as today's, the structural flaws of the euro are the primary cause of increasing the impact of a recession by creating asymmetric shocks among member-states.

    This is due to the design of the euro, which has been modeled to the Deutschmark, thus adopting a one-size-fits-all rationale (the policy of the Deutschmark was fundamentally different from that of many other countries but it nonetheless became the policy of all). Instead of creating a single currency upon the middle ground, one that would serve the diverging needs of its members (which wouldn't make sense for Germany and others to enter of course), European leaders built a currency that greatly benefited only one group of states – those who could adopt to the German model. The euro was from the outset a straitjacket for most member-states, who simply could not become as good as Germany. This immediately creates a gradual divergence in competitiveness among member-states, as those who could adopt experienced considerable growth in their economies, while those who could not adopt, had to loan money to cover for the increasing gap in competitiveness. This wouldn't have been a real problem if there was a fiscal union in place. That is a system/mechanism that would allow for the redistribution of the accumulated surpluses (just like national governments do in their regional policies, to prevent the state from breaking apart). These are certain structural flaws that make a recession much worse for certain members.

    For the euro to survive this ongoing crisis, it needs a fundamental redesign that will address its systemic flaws. The idea of expelling the less effective members will not work in favor of the euro, since in the occurrence of such an incident the market pressures will be immense, the euro's credibility and importance will be reduced and thus its role on the global economy will be considerably downgraded. Moreover the eurozone will be diminished and thus the benefit which derives from the "economies of scale" effect will become immaterial. So less incentives to keep the euro.

    Keep up the good work,
    Protesilaos Stavrou

    • Dear Protesilaos,

      Many thanks for your interesting and thoughtful comment, I think you are absolutely right! I especially agree with your last argument that only with a serious restructuring / redesign can the euro survive. However, as we all see it, the leaders of our Union are painfully behind history. Of course, it must be very hard to be a prime minister, president, chancellor, etc. but my personal view is that it is clearly shameful that they are kicking the can down the road without thinking about the possible grave consequences and the future, OUR future.



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