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A split up of the euro will increase the problems it intends to solve. The point is to address the existing ones instead of contemplating on self-defeating ideas.
|Image Source: Tukier|
Latest commentary on the crisis of the euro, is leaning towards the right direction of accepting that the crisis is systemic. I myself have been saying this for months now (of course others have been saying it since day one) and am glad to see the voices who support that idea, increase day by day. What worries me though is that much of the debate has now shifted to the other extreme of splitting the euro into two parts of what has come to be known as a Teutonic Union comprised of the core countries (Germany, Austria, Netherlands, Finland) probably together with some countries whose industrial sectors have practically fused with the German (Poland, Czech Republic) and a Latin Union led by France, including the Iberian countries, Italy and perhaps Greece. I consider the split up of the euro an absurd idea for four reasons: first because it will render immaterial the fundamental idea of a single currency, that of taking advantage of economies of scale to make business more competitive/efficient; second because a Latin Union will provide the perfect framework for a formal “Debtors cartel”, whereby all indebted nations will agree to trade with each other and screw the rest, including their creditors outside their area; third because it will institutionalize a “we-they” dynamic that will create all sorts of fissions on top of the existing divisions; fourth because it will ruin the long-term objective Europeans had to create a new reserve currency, with all the positive implications this has on the global standing of Europe – a Latin or even a Teutonic common currency will massively fail to achieve such an objective.
First consider the core idea of the inception of the single currency: economies of scale. A bigger single currency area means a bigger market for productive corporations to expand. Just like any reasonable person admits that global trade is beneficial for all parts and is far better than strictly localized trade, so does a single currency benefit all parts the bigger it is, provided that the countries that comprise it are qualified for membership. In practice, if the euro was only comprised of Germany and a few other countries of the North, there would be absolutely no incentive to create it in the first place, since it is a given fact that most of aggregate demand for the exports of surplus countries comes from the eurozone and to a large extend from the periphery, while also the economies of the periphery were able to grow more efficiently by being in a single currency with their surplus partners. The problem at the heart of the euro was that the aggressive exports of the core and the structural trade deficits of the periphery were not counter-balanced by a surplus recycling mechanism that would take the accumulated surpluses and recycle/reinvest them with profit, in structural projects in deficit regions so as to achieve balanced growth, convergence and reinforce the dynamic of the economies of scale.
Second the debtors cartel. Right now all states that would qualify for membership in this hypothetical Latin Union are indebted countries; indebted to their parters in the European center (France is somewhere in between, but is most likely to fall in the category of the indebted countries – see the Seven Classes of the Eurozone). Now think of the implications (and the incentives) of the creation of a Latin Union. The Latin currency will depreciate vis a vis the currency of the Teutonic Union, which practically means that debts towards the “Teutons” will be impossible to service or at least will become much more burdensome. This in conjunction with the institutionalization of the “Club Med” will provide the incentives to the “Latins” to coordinate their actions in order to default on their debts towards the “Teutons” and reinforce inter-Latin trade to balance the loses. This might sound like a plausible theory detached from the rules of the European market, but it would be extremely unwise to ignore the incentives politicians will have to take the easy path of teaming against creditor states instead of carrying out all necessary reforms. Let alone the fact that under such a scenario the Latins will in fact have the upper hand in the bargaining, which will reinforce their propensity to form such a “debtors cartel” or at least establish a balance of power that will resemble it (see The crisis of the Euro is deeply Political).
Third, EU fissions. Amid an economic crisis of such proportions whereby populist/demagogic rhetoric soars and phobic syndromes emerge, it would be a complete folly to set up, in a formal manner, a “we-they” division of “Latins” versus “Teutons”. The EU is already suffering from the multitude of speeds that have been created by the EU-Eurozone division and by the internal Euro alignments of surplus-deficit countries. Another layer of dispute and division will only intensify antagonism, if not give birth to the sort of destructive forces that plunged Europe into immense suffering some decades ago (though the latter is indeed an extreme scenario – it certainly cannot be ruled out as a possibility). The prudent choice is to set up these institutions/mechanisms that will ease the existing fissions and not produce more instead.
Fourth, reserve currency. The euro was created with the ambition to become an international reserve currency. Understandably a reserve currency would greatly increase the impact EU/Eurozone has on the global level, not only in economic terms, but also in political terms. We all know the extend to which USA benefit from the privilege it had to issue the global reserve currency. A split up of the euro, would automatically ruin that objective. First because the surplus countries that will constitute the Teutonic currency will lose much of their foreign aggregate demand (explained in point one above), which implies that their economies will not be as competitive, thus their currency will never have the standing the euro could potentially have. Second because the Teutonic currency will appreciate to such extend that exports of the export-oriented surplus countries will become less favorable to emerging markets, which again implies a fall in aggregate demand and therefore a weakening of the position of the “Teutons”. As for the Latins there is no need to argue in length about how will their common currency stand on the global level when most of the countries that comprise it are already far behind in terms of competitiveness on international trade.
From the above I think it becomes clear that a split up of the euro will create much more problems than it is likely to solve. As such I personally consider absurd the idea of creating a Teutonic Union and a Latin Union out of today’s single European currency (the euro). As I said I am happy that people are realizing that the crisis is not caused by the fiscal “irresponsibility” of some countries, rather by the structural flaws of the euro architecture. The point that many now need to stress, is not ways to increase the problems, but to solve the existing ones. Yes the crisis is systemic, so let us find ways to solve its structural roots instead of contemplating on self-defeating proposals.