Europe’s monetary priests begin to renounce their religion

A “suicide pact”. That’s what the famous Australian economist Steve Keen called the euro in a recent interview. And his views are catching on. But not where you’d expect.

Back in 2011, Jacques Delors told the Telegraph, “Everyone must examine their consciences.” About what? Here’s how the not-very-eurosceptic Guardian newspaper summarised the comments:

One of the architects of the euro, Jacques Delors, has said the eurozone was flawed from the start and that efforts to tackle its problems have been “too little, too late”.

Delors, the former president of the European commission, said errors made when the euro was created had made the current economic crisis inevitable.

Seven years later, some of the euro’s other architects have managed to follow Delors’ advice. They’ve examined their consciences. And found them troubled by the euro.

According to the European Central Bank’s (ECB) Twitter account, its president Mario Draghi said this:

I think the euro has been a success. Has everyone participated to this success? We have to ask why not. I would like candid, close introspection that could inspire future action on completing the monetary union.

Now it’s perfectly obvious why the euro has harmed some and benefited others. That’s what plenty of economists predicted would happen. I explain it in my book How the Euro Dies.

But isn’t it interesting that a common currency can be judged a success when it doesn’t benefit everyone? And isn’t it interesting that the answer to failure is more of the same. Completing the monetary union after you acknowledge it failed, just as its critics expected, seems like an odd argument.

This is so obvious that even the euro’s most dedicated backers are shuffling one foot out the door. Their apologies, excuses, denials and buck passing have already begun. Nobody wants the blame when the electorate asks who was dumb enough to create the euro.

Otmar Issing, the founding chief economist of the ECB, called the euro a “house of cards” in 2016. He claimed to have been against the euro all along, but he “had to accept this political decision to create a monetary union and to abandon national currencies”. He was just doing his job, as appointed. Which is sometimes called the Nuremberg excuse.

The ECB itself is now a risk, said its former chief economist Jurgen Stark. He’s worried that the ECB has no powder left for fight a crisis, which is a crisis trigger in and of itself, as I explain in Zero Hour Alert. Markets rely on central bank bailouts. A European crisis without a central bank bailout would be several times worse than Lehman Brothers – the only comparable example where a bailout wasn’t forthcoming.

The former chair of the Federal Reserve is also worried. Alan Greenspan said the following in a closed-door meeting:

I’m very worried. Mario Draghi, whom I know and he’s a very good guy, is just talking like we’ll do whatever is required. Well at some point somebody’s going to say, “I don’t want to accept euros.”

This is disgusting.

Don’t get me wrong. These high priests of monetary policy are right to point out the flaws of the euro. And hearing about how the euro developed from those who made it happen is fascinating.

But if these people think they can escape the blame for the consequences of creating the euro, they’ll have to try harder. It was the complicity of economists elbowing for jobs at the ECB that drowned out the warnings of their colleagues.

Most extraordinary of all, economists were willing to believe promises from politicians that they’d adhere to things like the Stability Pact and the no-bailout clause. Nincompoops.

Now the economists blame the failure of the euro on the lack of adherence to the rules…

The economists who created the euro have realised they’ve created a monster. They’re trying to save their reputation by blaming its failure on someone else or claiming they were against it all along…

The euro bait and switch

If the euro was so obviously a bad idea, how did it come into being? Roger Bootle laid out the sequence of events nicely in the Telegraph yesterday.

First they told us the euro would be good for us:

Although the primary motive for forming the euro was political, before its formation, key European leaders trumpeted the supposed economic benefits of the single currency. They believed that it would bring significant gains through a reduction of transactions costs and uncertainty, the deepening of financial markets and the imposition of good economic governance.

Once economists debunked that argument by pointing out just how dangerous it is to share the same currency, exchange rate and monetary policy, the story changed:

It was widely believed that sharing a common money, with all its implications for interest rates, fiscal policy and umpteen other things, would be both an expression of European unity and a major force for cementing it.

In other words, even if sharing a currency is a bad idea, it’s a good idea politically. Because sharing is caring. And being lumped together into one system is just what Europe needs. Why? To avoid a war, which was traditionally motivated by trying to unify Europe under one system…

Everyone from Napoleon to Hitler had the same monetary plan. Now the EU does.

Unfortunately, trying to unify Europe through a shared currency triggered the opposite reaction. Much like all efforts to unify Europe do. And in precisely the ways predicted by eurosceptics. There was divergence instead of convergence and economic crises eventually struck.

Those have created severe political unrest. Otmar Issing explained how this came about in his interview with the publication Central Banking:

There was no speed-up of convergence after 1999 – rather, the opposite. From day one, quite a number of countries started working in the wrong direction. […]

Quite a few countries – including Ireland, Italy and Greece – behaved as though they could still devalue their currencies. Of course, there is a problem if wages rise by more than productivity.

 Jean-Claude Trichet, ECB president from 2003–11, repeatedly expressed the dangers of such developments to the Eurogroup. But the politicians didn’t listen – and they certainly ignored the advice. So the problem accumulated over time, and only stopped because of the crisis.

Yes, blame those politicians for the fact that economists assumed they’d follow the rules in their economic models…

Once the divergences exploded into the financial crisis of 2008, and the European sovereign debt crisis, the europhiles just changed their tune, continues Bootle:

Once it subsequently became clear that the economy of the eurozone was experiencing considerable difficulties, it was common for European political leaders to claim that, as a political project, it had always been recognised that the formation of the euro would bring serious economic costs. 

They argued that these had to be borne in order to achieve the political objective. Indeed, some went further and claimed that without the euro the whole EU edifice might collapse. The implication was that although things might seem pretty grim in a number of eurozone members, this was a necessary price to pay.

The trouble is, the euro is turning very expensive indeed. Constant crises, recessions and banking debacles lead to unemployment and unrest. Which leads to some interesting politics in those countries which have the euro.

With the euro’s creators publishing their apologies, excuses, denials and buck passing already, there can’t be much time for the euro to run.

Especially given the plan to resolve all this…

What’s that definition of insanity again?

What completely mystifies me now is the solution which the europhiles propose. Actually, they don’t propose it, they just presume it.

To dreamers of a United States of Europe, the problem with a common currency is not the common currency, but the lack of a common everything else. If Europe were only more integrated, the currency would work.

According to an excellent speech by Yanis Varoufakis at the Oxford Union, that might’ve been the plan all along. The euro would lead to a financial crisis which forces Europe to decide: either integrate or fail. Given the decision-making powers are concentrated at the European Union, what do you think they’ll decide…?

The trouble is, the nation state isn’t gone yet. And even at the EU level, people do get some say in the affairs of Europe every now and then. They will soon, triggering the very crisis economists anticipated. Are you anticipating it?

Given the choice between a nation state and the EU, I don’t think the typical voter has quite made the switch to the EU. They’ll need plenty of fear stuffed down their throats to go along with that.

Varoufakis is happy to oblige. He told his Oxford Union audience that a return to a Europe of nation states would be catastrophic. “The alternative to a united Europe is a dystopia”.

Why? Because currencies would fluctuate. The Deutschmark would surge and the southern currencies would plunge, says Varoufakis. “Is this a Europe we want to live in?”

Yep, it is, in my opinion.

Well, I don’t want that to happen personally. I like the euro. Because it’s convenient for foreign travellers like me.

But here’s the thing. Those currency adjustments are corrections. They’re resolutions. They fix the imbalances that a currency union creates. They allow a return to growth. So if I was stuck in the EU, it’s precisely what I’d want.

That’s why Britain and Italy left the European Exchange Rate Mechanism (ERM). That’s why countries have left European and other monetary unions the many times they’ve been tried.

A Europe without a common currency would be about as dystopic as the UK is now. With economic growth seven and a half times the EU’s levels, unemployment at multi decade lows and a lack of populist extremist parties…

A Europe which must be held together by ever more integration against the will of its people is the real dystopia. A place where only one direction is allowed and it is arbitrarily labelled progress, even when it’s so obviously bad that even the ECB president admits it.

The good news is, the eurozone’s suffering may be coming to an end. When someone like Otmar Issing is willing to criticise his life’s work as a house of cards, and even the current ECB president acknowledges some countries didn’t even benefit from the euro, you know it’s in deep trouble.

If only Britain wasn’t Europe’s financial centre – the one domino guaranteed to fall in the coming financial crisis.

Find out when here.

Until next time,

Nick Hubble
Capital & Conflict

Category: Geopolitics

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