Systemic flaws of the Euro are the root of the debt crisis

2011-07-04

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Structural flaws of the euro are the source of the problem Image source:FPB

I have said in previous articles that the crisis in Greece is not “Greek”, it is rather a “European” issue, not only because it affects directly and indirectly all EU member-states, but mostly because it is the end-product of a serious structural flaw of the single European currency: That is the lack of wealth redistribution within the eurozone, through a coordinated fiscal policy (fiscal transfers is the term).

The single currency was not created upon the idea of balanced growth and convergence of national economies, but upon the logic of maintaining economic indices at nearly equal nominal levels. Those indexes being public debt to GDP, long-term interest rates, budget deficit, exchange rate stability, which are encapsulated in the Stability and Growth Pact. This prevented the drafters of the single currency from taking into consideration the core issues of the real economy, which are productivity and competitiveness that start from a regional level.

The Stability and Growth Pact, in addressing only nominal indexes left aside an essential element of an optimal currency area and of an effective economic governance, which is the redistribution of income among euro member-states that would prove to be a preemptive measure in dealing with asymmetric shocks and crises within the eurozone. Thus the European Monetary Union (EMU), the framework of the single currency, failed from the outset to envisage the creation of mechanisms that would ensure a long-term convergence of national economies, which would safeguard the viability of the single currency itself.

European leaders created a monetary union, a single currency, without a coordinated fiscal policy (a fiscal union), thus leaving the euro open to serious shocks that would hit directly at this systemic flaw. This is the reason why the once two-speed eurozone has become two-tier, since national economies grew unequally, as the economies of the more efficient countries of European center were concentrating the surpluses of the eurozone, while the periphery was left with debt and the illusion of prosperity that came from the once cheap loans. That is the reason why we say that the surpluses of the North (Center) are the deficits of the South (Periphery).

Failing to address the structural flaws of the euro, means failing to see the real problem, which is basically what happens today, since all European officials speak of the “Greek”, “Irish”, “Portuguese” crises, as if those are not related anyhow to the way that the single currency functions. That kind of approach, is made manifest in the bailout packages that are given to these countries, which do not aim at preventing defaults and bringing national economies back on track, but at buying precious time for German and French banks, who hold a considerable share of debt of the European South, so as to avoid a more generalized crisis. The bailouts are thus a means of indirectly financing German and French banks and minimizing loses.

These practices will not solve the problem. All they will do is accumulate more problems that go beyond the scope of economics into social and political spheres that will at some point erupt with unpleasant consequences for the EU architecture. For as long as the systemic flaws of the single currency are not touched upon, there will be no viable solution to the eurozone’s debt crisis.