Speculation on the demise of the euro

NRC International, 15 February 2010 12:33, by Egbert Kalse

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With the euro under siege, some economists are arguing radical solutions, like splitting the currency in two.

• News - Greece struggles to save face over budget deficit
• Feature - Brussels knew about staggering Greek budget deficit in July

Could the euro fall after all? Until recently, the scenario seemed unthinkable, but now that the European monetary union is decomposing at the seams, it suddenly seems realistic. Only 11 years after it was introduced to the financial markets, the currency has become the plaything of currency traders.

The Greek debt crisis has triggered traders to gamble on the euro, and economists to speculate with them.

“What’s happening now is exactly what we have been warning people of for years,” says Alfred Kleinknecht, a professor of economics at Delft University. Self-proclaimed eurosceptic Arjo Klamer, a professor of cultural economy at Rotterdam’s Erasmus University agrees. “Unless the rules of the game are changed the euro will be done for quickly,” he says.

European Cassandras

The two were part of a group of 70 Dutch economists who published an open letter opposing the Economic and Monetary Union, the predecessor of the eurozone, in 1997. They then argued a monetary union like the euro could only be successful if it was backed up by a strong political union. Without it, the euro would be doomed. The economists were heckled as Cassandras at the time, but now that the euro is in hot water, their dire warnings ring more true.

In the absence of clear political leadership, confidence in the euro has begun to waiver. Even though the current exchange rate of approximately 1.36 dollars is not dramatic, historically speaking, the sentiment in the market is. British and American press seem to have declared war on the euro and opportunistic hedge funds are trading against the beleaguered currency.

Right now, Greece is the staging ground for an all-out attack on the euro. But next month, it could be Spain, Portugal or Italy’s turn.

Some, like Age Bakker, a Dutch executive director with the International Monetary Fund, feel the current unrest and pressures emanating from financial markets provide the perfect opportunity for the currency to prove itself in tough times.

Kleinknecht, however, argues the euro needs some strong medicine. He suggests breaking the eurozone into two parts, a northern one and a southern one. The former can then adopt the Nordic, or Northern currency, the latter the Medic, or Mediterranean currency.

Klamer has an even more radical solution. “We should get rid of the entire euro. It would lead to unrest in the financial market, but it would allow the smaller member states to adopt their own social policies again.”

Kleinknecht offers that after a break-up of the eurozone, countries like Hungary and Rumania, that are now excluded, could join the proposed southern currency. “This is the only way we can bring balance back to the eurozone,” he says.

Who will join the southern euro?

Casper de Vries, a professor of monetary economics at Erasmus University begs to differ however. “Who would want to be a member of the southern currency union? No one, that’s who,” he says.

Bakker of the IMF also thinks little of radical solutions. “The current attack on the euro has had a disciplinary effect. But it is a pity that the eurozone’s member states needed such a stern warning before they realised the euro needs tending to. That goes for Greece as well as it does for all the other European countries that need to get their budgets in order,” Bakker says. The IMF did not fear an imminent collapse of the currency, he adds. “We look at currency exchanges regularly and the euro is fundamentally in a good place.”

According to Kleinknecht, the problems the 16 eurozone member states are currently experiencing can be chalked up to imbalances within it. “The eurozone is having the same problems China and the US are on a larger scale. Countries like the Netherlands and Germany have gargantuan trade surpluses, while countries like Spain, Portugal and Greece have trade deficits amounting to some ten percent of their domestic product. Those deficits are mostly paid for with borrowed money. Rising employment in the Netherlands is effectively stolen from southern member states. This can only last for so long,” Kleinknecht says.

Klamer agrees. “A strong political union backing the monetary one has repeatedly proven to be a bridge too far. One of the two will have to go: national budgetary sovereignty or the unified currency,” he says.

De Vries acknowledges the eurozone suffers from these inequalities. “Theoretically, labour migration is the way to even out these disparities, but in practice language barriers and pension problems pose roadblocks,” he says. Free trade, a possible substitute for the open exchange of labour, can also do little good in this respect, since it only applies to products and not to services, which make up 70 percent of the European economy. “The Greeks will do whatever it takes to remain part of the euro. The only option left is lowering wages,” De Vries says

The three economists agree on one thing: the monetary union’s continued existence can only be guaranteed if Europe will provide for political and budgetary leadership

Something rotten in Greece

• The current euro crisis was set off by the Greek budget deficit, which the Greek government announced late last year, would top 12 percent in 2009. The European Union has been slow to respond to the problem so far, causing uncertainty in financial markets. The finance ministers of the Eurozone are set to meet today to discuss how to handle the problem.

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