The Euro Experiment
It was always blatantly clear that an EU monetary union would inevitably require
a political union to centralize decisions about tax and public spending. Without
this occurring it was a misconceived and terrible blunder (that some of
us argued it was when it was initially constructed) but it is turning out
to be even worse than we originally perceived because of its underpinning Euro
currency.
We are now witnessing that the EU experiment has become so damaging and divisive
that public opinion will now never tolerate a political union. So not only
was the cart put before the horse, but the horse will not now contemplate even
following the cart at a distance!
One of the reasons is that it has made peripheral countries, like Italy, Spain,
Portugal and Greece, poorer while others got richer (at least on a relative
basis). Forcing many countries to have the same interest rates and exchange
rate was foreseeable always going to be a problem. Many saw it as leading to weaker
member economies having booms followed by big busts, as has happened in Ireland,
Portugal and Spain.
All of this has lead to per capita income of Italians for example being lower
now than in 2000, which is why they are – not surprisingly – getting increasingly
restive, while in the meantime, the German economy has kept on growing, and
the average German is about 20 per cent better off over the same period. The
euro is a cheaper currency than the Germany Mark would have been if it still
had the Deutschmark, while it is more expensive than Italy would have if it
still used the Lira. Germans therefore keep exporting easily and running up
a surplus, while the Italians struggle and go deeper into debt.
Furthermore, the freedom of movement of capital in Europe probably makes this
worse – why would you put your euros in an Italian bank when you can invest
them in Germany? Membership of the euro has thus put the Italians (and what
we once politically incorrectly referred to as the PIGS or GIIPS) on a
permanent path to being poorer.
Simply stated, the euro zone doesn't have the fiscal or banking unions it
needs to make monetary union work, and it's not even close to changing that.
In the meantime, the euro's continuing flaws further suck countries into crisis while their
politics get radicalized out of misunderstood populist frustrations.
A Failed Currency
The
Atlantic pointed out the flaws the Euro was facing back in 2013 shortly
after the EU Banking Crisis while matters have been only steadily deteriorating
since:
1. Too Tight Money
The euro zone isn't what economists call an "optimal currency area." In
other words, it was a bad idea. Its different members are different enough
that they should have different monetary policies. But they don't.
They have the ECB setting a single policy for all 17 of them. That's a particular
problem for southern Europe now, because their wages are competitively high
relative to northern European ones, and the ECB isn't helping them out.
There are two ways to fix this intra-euro competitiveness gap. Either northern
European wages rise faster than normal while southern wages stay flat, or
northern European wages grow normally while southern European wages fall.
It's the difference between a bit more inflation or not -- in other words,
between looser ECB policy or the status quo. Now, it might not sound like
it really matters which option they choose, but it very much does. Falling
wages make it harder to pay back debts that don't fall, setting off a vicious
circle into economic oblivion.
2. Too Tight Budgets
Austerity has been a complete
disaster. It's actually increased debt burdens across southern Europe,
because it's reduced growth more than it's reduced borrowing costs. And
now northern Europe is getting in on the act. France (which is really somewhere
in between "southern" and "northern") just missed
its deficit target, and is set to slash more; the Netherlands has put
through contentious tax
hikes and spending cuts, even as its economy has shrunk; and even Germany
is contemplating new
budget-saving measures. In other words, the euro has become an austerity
suicide pact.
3. Too Little Trade
Excluding Germany, just over half of all euro trade is with each other.
But with bad policy pushing southern Europe into depression and northern
Europe towards recession, euro zone countries can't afford to buy as much
stuff from each other. That adds a degree of difficulty to recovery for southern
European countries that need to export their way out of trouble. As you can
see in the chart to the right from Eurostat,
intra-euro zone trade has stagnated the past few years (and headed lower
since) after rebounding from its post-crash depths. The euro zone's weak
links are dragging the rest down -- but only because the rest refuse (or
can't) to pull the weak ones up.
4. Too Much Financial Interconnection
Other country's problems can quickly become your own if your banks own their
bonds. Especially if your banks are bigger than your economy. That's the
lesson Cyprus learned the very hard way after its banks loaded
up on Greek debt in 2010, only to get wiped out a year later. The Financial
Times has a great
infographic (that you should play around with) on which country's banks
are exposed to which other country's debt across the euro zone. As you can
see below, any kind of Italian restructuring would be tremendously bad for
French banks.
The Eruption Has Been Building
The mood in the EU according to the Socionomics Institute has been steadily deteriorating since
the initial "Enactment Era" as we then entered the "Expansion Era", then the "Bailout
Era" and now appears to be inevitably heading towards the "Depression Era"!
The Eruption of Exploding Populism
A global mood shift which I recently explored in a
video with Charles Hugh Smith is causing Political Polarization, Lack
of Cooperation and a Rebellion against Political Correctness which are all
presently manifesting themselves into a rejection of the status quo, "the
system" and those trusted with its maintenance in many regions of the world.
The rapid emergence of new anti-establishment populist parties skeptical of
the European integration are all strong indicators of the failure of the Euro
Experiment (which we cautioned about years ago) as well as in parallel with a
global behavioral sentiment and mood shift.
We presently foresee a steady sequential set of highly charged political events
throughout Europe coming in 2017 which portends of mounting political instability
and social unrest.
Souring social mood, loss of purchasing power, stagnating wages, rising inequality,
devaluing currencies, rising debt, political polarization and elite disunity
are all manifestations of a phase Charles Smith and I labeled as the "Dis-Integrative
Winter" in our analysis of long wave cycles: Cycles
- Anti-Globalization and The End of The Debt Super Cycle.
There is a "Dis-integrative Winter" stage to all of our well established
long wave cycles.
An Increase in Nationalism and a Reversal in The Globalization Trend
As a consequence of the above we facing something completely unexpected but
tremendously important. A shift globally away from Globalization and towards
Nationalism - exactly the wrong development for the EU experiment to move in
the direction it requires to have any possibility of success.
The June 2008 issue of Progress in Socionomics reported:
Scientist predicts a reversal of the trend toward globalization. Dr. John
L. Casti's presentation at the Cycles and Patterns in Business and Finance
Conference depicted and expanded upon Elliott Wave International's forecast
of a reversal in the trend toward globalization.
There is No Exit From The Euro!
In implementing BREXIT (which like the Italian Referendum toppled the government),
Prime Minister Theresa May is going to have substantial problems with exiting
the EU but at least the UK always maintained the Sterling!
Leaving the euro, however, is a far more difficult problem than leaving the
EU. As everyone now knows, Article
50 provides for leaving the latter. It may be a vague and inadequate rule,
on which the Supreme
Court is now deliberating at length, but it is nevertheless a rule that
provides for getting out.
The eurozone has no such rule. This is a burning building you are never
meant to leave. What is more, you are barricaded in. If you contemplate leaving,
you have to face not having any notes and coins of your own; the need to default
on debts that will be even bigger when your new currency goes down in value;
and the collapse
of your banks because being in the eurozone means they were able to borrow
money they should never have been lent.
Tens of millions of people in southern Europe will increasingly find that
they cannot tolerate staying in the euro, but nor can they leave it without
great cost.
Their anger and resentment will only intensify.
Gold Standard versus a Fiat Euro
The
Atlantic postulated further in 2013:
The euro is the gold standard minus the shiny rocks. Both force countries
to give up their ability to fight recessions in return for fixed exchange
rates and open capital flows. But giving up the ability to fight recessions
just makes it easier for recessions to turn into depressions. And that puts
all of the pressure on wages to adjust down when a shock hits -- the most
painful and destructive way of doing things.
But the gold standard had an even bigger design flaw than creating depressions.
That was perpetuating depressions. Under the rules of the game, countries
short on gold were supposed to raise interest rates, which would push down
wages, and push up exports. More exports would mean more gold, and then lower
interest rates. But there was an asymmetry. Countries needed gold to create
money, but countries didn't need to create money if they had gold. During
the Great Depression, the U.S.
and France sucked up most of the world's gold, but didn't turn it into
money out of fear of nonexistent inflation. Countries that needed gold needed
to push down wages even more to make their exports competitive -- not that
there were any booming markets for them to export to, due to the self-inflicted
economics wounds of the U.S. and France. Instead, the depression just fed
on itself.
The euro suffers from a similar asymmetry. Debtor-euro countries
are to cut wages and deficits, but creditor-euro countries aren't forced
to increase wages and deficits. Perversely, the opposite. In other words,
northern Europe isn't doing enough to offset the demand destruction in southern
Europe. And it's sinking them all. Even worse, this slow-motion collapse
is turning loans that would have otherwise been good into losses -- losses
that force bailouts and faster collapses. But, to be clear, this isn't only
a problem for the periphery. As the U.S. and France found out in the 1930s,
it's generally not a good idea to force your customers into bankruptcy. That
just creates depression without end -- until the gold (or euro) standard
ends. It's no coincidence that the countries that ditched the gold standard
first recovered from the Great Depression first.
History doesn't need to repeat, or even rhyme. Europe doesn't have to keep
crucifying itself on a cross of euros, the gold standard of the 21st-century.
The euro's northern bloc could decide to let the ECB do more. Or it could decide
to start spending more. Or not. Eurocrats seem content to do just enough to
keep everything from falling apart, and nothing more. It's one part inflationphobia,
and another part strategy. Indeed, it's how they try to keep the pressure on
the southern bloc to push through unpopular labor market reforms. But doing
enough today eventually won't be enough tomorrow if the southern bloc doesn't
have any hope of recovering within the euro. The politics will turn against
the common currency long before that.
Things that don't bend inevitably break.
