On the fundamental fallacies of Euro-exit advocates

2012-03-09

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The costs of exiting the euro are significantly higher than the benefits. Image credit: Reuters

Regular readers of my articles are well aware of my opposition to the argument that considers orderly exits from the Eurozone and reconstitution of national currencies as the best course of action for countries mired in economic depression, such as Greece or even the rest of the GIIPS. My opposition is established, first and foremost on my fundamentally different approach to economics; one that deviates from the economic mainstream and especially from the field of standard macroeconomics. Next my counter-arguments are based on three pillars that are often neglected by many:

1. a revision of the very notion of “competitiveness”, where I uphold that countries do not compete with one another – only businesses do, thus a macroeconomic aggregation cannot see which sectors of the economy really need a boost of competitiveness and most importantly against whom. The assertion that exports in general will be boosted, is inherently flawed and misleading.
2. no real correlation exists between exports and currency depreciation, since such claims are not consistent with the facts. The productive capacity of an industry cannot increase by means of depreciation, nor can the rooms of hotels be expanded in a similar way, nor will the fields become more fertile to increase agricultural production. Even with depreciation of the currency deep reforms are still necessary to boost real competitiveness and productivity. As such the effects of currency depreciation are at best largely overstated.
3. there is a profound difference between a currency union and a fixed exchange rate. More so there is an even greater distinction between a currency union and a monetary union. Those laboring under the assumption that exits from the euro are good, confuse a monetary union such as the eurozone, with either a currency union or even worst with a fixed exchange rate. The eurozone is a monetary union (or Economic and Monetary Union), established upon a complex system of central banks – the Eurosystem, which then coordinates its policy with the European System of Central Banks – encompassing 17 sovereign nation-states, within the context of a single market. In addition it lacks a genuine fiscal union backing it, while its political dimension, the EU, is even more complex, resembling a “political UFO” that is neither a federation, nor a confederation, nor a super-nation, nor inter-governmental cooperation.

Anyone willing to argue persuasively in favor of an exit from the euro needs to establish the following:

1. the gains in competitiveness of certain export industries will be greater than the losses from all other sectors of the economy that will not benefit from the massive depreciation of the currency,
2. the purchasing power of individuals will indeed be higher than before – something that I am afraid will be almost impossible to do, given that massive inflation will quickly kick in, the financial system will be obliterated, the black market will run rampant, the state will have to increase tis supervising mechanisms to control capital, prices and collect taxes, while the (imported) standard of living of will fall dramatically,
3. the myriads of interconnections that exist between the member-states of the eurozone, either those are measured through the payments between central banks (see analyses on the TARGET 2 payment system), or the exposure of banks to each other or to sovereigns, or even the businesses that operate across borders and finally the citizens themselves; will all not be hindered from an exit from the euro, or if they are indeed affected, the effect will be marginal and ancillary. Here I may say that any exit from the euro will simply trigger a series of cascading effects that will see full scale bank failures, massive loss of capital, great uncertainty and confusion between officials and citizens; ultimately doing much more harm than good to everyone involved, thus annulling any benefits that could have existed from an orderly exit from the single currency.
4. the government that will have the audacity to exit the euro, creating all that smoldering mess in the process, will be perfectly prepared for political isolation or even covert diplomatic embargo, at all European centers of power. The political cost will be significant, hence those who argue in favor of an exit need to convince us that this will not be the case and still the benefits are more than the loses.

The above-mentioned list is of course non-exhaustive, as there are several other issues that one could raise to challenge the arguments that are in favor of an orderly exit from the Eurozone. However I believe that these are enough for the time being.

As a concluding remark I would first like to remind my readers that I am in favor of deep reforms at local, national and supranational level, not just in the economy but also in the political level and these can only be materialized within the context of the Euro and the European Union. A united Europe has many benefits, the point is to make it beneficial for the individuals and this will be done when we abolish all delusions pertaining to the “cornucopia” of the welfare system, the scandalous protectionist policies at EU and national level, the stunning democratic deficit at all levels of governance, especially the European; and the collusion between big governments and big corporate interests against the average consumer, worker, entrepreneur and citizen.

Exits from the euro that will supposedly produce more good than harm, are wild delusions at best and unbridled speculation at worst.