What if “whatever it takes” isn’t enough for the Euro?
(ORIGINALLY POSTED AT THE WORLD ECONOMIC FORUM SITE) It doesn’t really matter what Mario Draghi, head of the European Central Bank, announces this week. The Eurozone has bound itself into a series of commitments and conditions that value the maintenance of the single currency over the competitiveness of the countries that are part of the Euro – yes, even Germany.
In fact, further moves towards a closer economic and banking union will only serve to do three things, all of which are negative for Europe.
First, the continued burden of an uncompetitive currency will make economic trading conditions intolerable for the weaker, debtor nations such as Greece, Portugal, Ireland and Spain. They will be forced to continue down a path of austerity and brutal internal deflation. The long-term effects on both the national competitiveness and on the people of those countries will be severe and take decades to reverse. The story of the “survival of the Euro” will continue to dominate regional and global thinking – and produce its own self-fulfilling uncertainty.
Secondly, the political, moral and monetary ammunition of the continent will be squandered on this fight – one lost long ago. That money, including Germany’s, could be much better spent on more useful things. It could be returned to taxpayers to help them spend more. It could be invested in necessary infrastructure. It could be deployed in R&D. That is where Germany may lose out by letting this continue, even if the effects of returning to a proto-DMark would give them some heartburn of their own with respect to competitiveness.
Last, but by no means least, the political system takes a hit. We elect our leaders to help administer our towns, regions and nations for us. Part of the challenge of being in politics is that it is so very difficult to admit mistakes or to reverse course. In this case the momentum of “saving the Euro” dominates the discourse. In pursuing this aim, above all, our political elites do a disservice to the people they serve. This is not just a moral hazard argument about politics and politicians, but one where the consequences of private (banks) and public (citizens and governments) behavior over the course of the credit boom has to have clear and proportionate consequences for the people who caused the problems.
In business terms the Eurozone is focused on the balance sheet, whilst the Profit & Loss of the region is going to hell. Accounting rules eventually force companies to write off things on their balance sheet that are clearly failed investments. The countries of the Eurozone need an alternate approach that “writes-off” much of the mess we got into over the past decade.
We correct our mistakes, we clean up the mess quickly, we move on with doing what is needed to make a competitive future for Europe.
After all, it would be a twin evil to leave subsequent generations a debt mountain AND no competitiveness to help them service it.
UPDATE 15th September 2012 – despite the announcement last week that the ECB will begin printing money and will use it to buy soveriegn debt, and despite the “positive market reaction” I still believe this analysis to be correct. The debtor nations in Europe still face a decade of lost competitiveness.