– The Broken Model Of The Eurozone (The Automatic Earth, Nov 8, 2014):
I stumbled upon these few words in an Ambrose Evans Pritchard article the other day, and they hit me almost like some sort of epiphany, which in turn made me feel a little stupid, because it’s all so obvious. What Ambrose wrote (and this time I’m not making fun of him), was about the eurozone (EMU), of which he said:
The North is competitive. The South is 20% overvalued.
And I realized that’s all you need to know about the eurozone, and about why it will fail. Or has already failed, to put it more accurately. There’s no other information required. Other than a bit of context perhaps to clarify.
Before the euro, and the eurozone, countries like Greece, Spain, Italy, Portugal, would perform 20% or more lower economically than Germany or Holland would. And that was kind of alright, because periodically, their governments and central banks would revalue (devaluate) their currencies down against for instance the Deutschmark by those same 20% or so.
Of course Germany hated this to an extent, since it made it harder for its industries to compete against Greek and Italian companies. Which may by the way well be a mostly hidden reason for them to push the eurozone on the Mediterranean. Devaluation still worked for many years, though, and as we presently find, it was the only thing that could have worked.
Today, because they now have the same currency, and devaluation is thus impossible, and southern Europe also still underperforms the north, there’s only one possible outcome: the south keeps getting poorer all the time. It’s inevitable. Unless Greece starts outproducing the Germans, and we all start driving Hellas quality cars, but that’s not in the cards.
The fatal flaw in the eurozone model is that there’s no way, no escape clause, to rectify the inherited differences between north and south. Moreover, because there isn’t, the differences must and will get bigger. There’s nothing any kind of stimulus by the ECB or EU can do about that.
Unless they directly tax the Germans and Dutch and Finns with the stated purpose of handing what they raise directly to the Greeks. Not going to happen. And there was never any intention of doing such a thing. The Germans wanted to expand their distribution markets, and the Greeks were promised they’d get richer by default if they joined the shared currency.
Neither side thought this through, not with a longer – or even medium – term view. The Greeks et al are the first to pay the price, but the Germans will end up paying as well, no matter how the growing tensions and differences end up being resolved.
All anyone ever considered was a tide to lift all boats. But there is no such tide now. There is no economic growth, other than perhaps in a few niche markets (and they will fall too). And no provisions or plans were ever drafted for this to happen.
Ambrose’s 20% may be underestimating things, or overestimating them. It makes no difference other than perhaps in the timing of events. And not all southern nations will be overvalued – and underachieving – vis a vis Germany – by the same percentage. But that doesn’t matter either down the line.
All countries that entered the EU in the past received large sums of money for things like infrastructure projects. But that money is long gone. Now it’s back to the same performance ratios that have existed for many decades, if not for centuries.
The only thing that might help southern Europe here would be debt restructuring on a massive scale. Still, that would be considered far too costly by the north, provided it even could be achieved in a globalized finance system (look at Argentina).
What makes this interesting is that there is now a question of responsibility. Are only the Greeks accountable for their debts, or is the entire eurozone, given that they share a common currency? These are issues that should have been resolved in times of plenty; in times of less they will prove extremely hard if not impossible to solve.
Northern Europeans see their lifestyles being cramped from many sides in the ongoing crisis, and they would not accept more being taken from them to be handed to Greece. Even if 50%+ of young Greeks have no jobs, and over 40% of Greek children grow up in poverty. That’s not how the union was explained to them. And they would not have agreed if it had been.
The fact that Brussels has attracted a highly dubious breed of politician and bureaucrat certainly hasn’t helped, and still doesn’t. But it’s not the core problem. The core is that there never was a mechanism to reconcile the 20% differences, which means we’re fast on our way to 30% and more. Nothing anybody can do about that other than to leave the union.
The EU was founded on ideals of peace. But unless someone does something, fast, it will be the source of bitter and bloody fighting. Better wisen up now, guys (and I don’t mean the leadership, they’ll go on till the end). In math, there are things that just don’t add up. This is one of them.