Another week, another crisis for the euro -- and there's plenty of more crisis weeks to come! It's going to get a lot worse for the euro -- but can it ever get better? It's far more likely that the euro project is in terminal decline and that nothing can save it.
If the euro were a business, it would have been wound up by now. It has an awful business plan that only appeared to work in the benign economic conditions of the first few years of this century and whose inadequacies were painfully exposed when it first experienced economic problems. Only the core business -- that is, Germany -- has been able to withstand the harsher economic conditions in existence since 2007. There is boardroom squabbling, the workforce is in rebellion, and no one has a viable Plan B for a sustainable way ahead.
Eurozone leaders claim to have a survival plan but the details are murky and appear largely to be more of the same: structural reform to make member economies more competitive; a new fiscal pact to ensure member states live within their means; and some new infrastructure spending to soften the impact of austerity that is making voters angry.
Anyone who thinks this is going to work is deluding themselves. Structural reforms are a euphemism for labor and financial market deregulation. Labor market reform usually entails neo-liberal retrenchment of workers' rights, which enhances the economic insecurity of ordinary people and makes them reluctant to consume. And financial market deregulation was what got the world economy into its current mess. Moreover, some eurozone economies currently regarded as basket cases are adequately competitive on any measure. Take the case of Ireland, one of the three members subject to very harsh bailout terms. Accounting for just 0.3 percent of world GDP, it has a 3 percent share of world trade in services and 6 percent in pharmaceuticals, and it has a better record on foreign direct investment than Germany!
Fiscal pact is a polite word for very tight budgets, but these are already making the current situation worse. So far as eurozone (and U.K.) government leaders are concerned, it's as if Keynes never lived to teach the world anything about economics. Instead of following his prescription that states should offset the decline of private demand in hard times, they have cut public spending in a vain effort to appease public debt-averse financial markets. The all-too-predictable outcome is to further depress demand and put recovery further away than ever. Adding insult to injury, retrenching governments then face financial market criticism for the absence of growth!
Instead of limited infrastructure stimulus, European countries need a substantial short-term boost to public investment and social program outlays to revive demand. Otherwise the continent will go through a Lost Decade and more that will heap unnecessary misery on millions of its people and result in huge problems for the global economy.
Stimulus of any scope does not address the fundamental problem of the eurozone, however. The project is simply unworkable. The basic flaw in the enterprise is that the conventional structural adjustment of currency devaluation is not available to its economically-troubled members.
There is a clear lesson in history about the virtues of currency flexibility. In 1925 Chancellor of the Exchequer Winston Churchill returned the U.K. to the gold standard in the belief this was a surefire method of restoring the nation's economy to its prewar vitality. Calling this initiative madness, Keynes rightly warned the Conservative government of the day that it would cripple exports, produce mass unemployment, and generate huge labor unrest. Amid deep financial crisis in 1931, however, a coalition government flew in the face of orthodoxy to take Britain off the gold standard. Doom-sayers predicted financial chaos, but none ensued. Instead the abrupt devaluation of the pound from $4.85 to $3.40 resulted in a 25 percent increase in industrial production and a decline of unemployment from 3 million to 2 million within four years.
The establishment of the eurozone in its original form will go down in history as a great mistake. The only sensible solution is to call the whole thing off. There may be scope to reconstitute a more limited venture comprising the Northern European countries with similar economic strengths. However, there are too many powerful interests in Berlin, Paris, Brussels, and elsewhere with an outdated devotion to a failed venture for that to happen any time soon.
Accordingly the future for Europe is economically bleak -- and the political repercussions of that could be dangerous. The far right is showing signs of revival in "civilized" Europe from Scandinavia to Greece. It's time to heed the economic and political lessons of the inter-war era because European leaders are currently repeating the mistakes of that past.
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