What Euro Crisis?

If the euro really is to blame for the current difficulties and negative developments plaguing the Eurozone, the chances of the currency union being a success would be very slim indeed. However, this is not the case, no matter how hard the busybodies try to hammer this idea into our skulls through one-sided talk shows and pseudo-scientific articles.

If the euro were responsible for the particularly virulent macroeconomic issues currently facing Europe, then the Eurozone would exhibit a particularly pronounced imbalance in its current account balance and level of public debt. In fact, the opposite is true. The Eurozone’s current account balance is almost completely balanced and its level of new debts in 2010, at just under 7 per cent of total GDP, was well below that of Japan (just under 10 per cent), the United Kingdom (just over 10 per cent) and the United States (around 11 per cent). Mind you, this comparison is based on the Eurozone as a whole, making it inaccurate to speak of a “euro crisis”. Within the Eurozone, the situation looks quite different, with individual countries undeniably in trouble. Now we finally get to the root causes of the crisis – the mistakes made by individual countries that have come home to roost.

In the case of Greece, this was reckless financial policy over many years, the true extent of which the Greek authorities largely managed to hide through the manipulation of statistics.  Meanwhile, the main cause of the crisis in Ireland was the excessive number of loans being granted by the financial system, particularly in the years of the real estate boom. Back in 2007, Ireland still had a fully balanced budget and it wasn’t so long ago that economists were describing the country as the “Celtic tiger” thanks to its economic output. Ireland’s rescue plan essentially serves as a bail-out for the banks. The same applies to the aid given to Greece in the sense that in early 2010 German and French banks granted receivables to Greece totalling 44 and 71 billion US dollars, respectively (this amounts to around 57 per cent of all consolidated foreign receivables made to Greece). Given the recent bankruptcy of Lehman Brothers and the global financial crisis that was still not quite over, it is understandable that Europe’s leaders saw restructuring Greece’s government bond debts, as opposed to implementing the bailout plan, as too risky.

Therefore, we should all be clear about which direction reform efforts need to be going in order to avoid similar crises in the future as much as possible. First, prominent banks should not be allowed to be in a position where they can hold the government and tax payers hostage. Possible solutions could be either systemic equity bonuses or a specific strategic tax (“Pigovian tax”). Secondly, after the current rescue plan expires, we need a functional crisis mechanism. Such a mechanism must, depending on the severity of the fiscal misconduct in question, provide for the involvement of private creditors when resolving public financial difficulties. Thirdly, we must decisively toughen up the Stability and Growth Pact. The German Council of Economic Experts has presented proposals relating to all three aspects.

Germany leaving the monetary union was certainly not among the proposals. Such a move would be extremely foolish, resulting in a massive appreciation of the newly reintroduced Deutschmark, which would have serious negative consequences for German exports and jobs. The ability to avoid significant fluctuations in nominal exchange rates is, from an economic perspective, a strong justification for the monetary union. As the economic literature (Mundell-Fleming model) teaches us, we can only have two of the following three options at any one time: stable nominal exchange rates, autonomous monetary policy and the free movement of capital. The monetary union offers a way out. Promoting this view is, of course, much more difficult than wallowing in nostalgia for the Deutschmark.