The Euro - not that much of a crisis

Ever since Greece got into financial trouble at the beginning of this year, there have been people, mostly from outside the currency union, who predict its sudden demise. I will stick out my usually so agnostic neck here, and say that they are talking utter rubbish.

Is there a crisis? Yes, of course it is. Greece, Ireland, Portugal, Spain, all have huge economic difficulties. However, it is not a crisis that is worse than other economic crises in the past. The world economy is a dynamic system, and there are bound to be crises popping up here and there, like in Denmark in 1987, the United Kingdom and Japan in 1992 or Taiwan and Korea in 1997. All those countries had their own currencies, and that did not save them from any crisis at all. Some of them have recovered, like Taiwan and Denmark, and some have not, like the UK and Japan.

The recent crises within the Euro area proves that the Euro is not a fool proof way of keeping a country out of economic troubles, but I do not know anyone who ever claimed it was.

There is a crisis, an issue, a problem, a situation, and now politicians and the market forces are working on solving it. We do not know yet, how good or swift the solution will be, but it is very likely that there will be some solution.

The Euro prevents some traditional ways of solving the problem. Spain cannot devalue its currency to get more competitive. However, devaluations are very blunt instruments. With a devaluation, everyone in a country gets temporarily poorer. Everyone will get less money to buy imported goods - and domestic goods, made of foreign parts. A domestic company which needs foreign parts to sell on the domestic market will be hit by a devaluation, perhaps so much that it actually goes out of business, causing unemployment and further disasters. If Spain would devalue its local currency, it would lower the salary for all those people who work for financially sound companies, as well as the ones that need to become more competitive.

With the Euro, there will be no devaluation, and financially sound Spanish companies will be able to do business as usual. Other companies will have to take some drastic measures, like laying off people or lowering salaries. However, if there had been a devaluation, Spanish companies would get more competitive, and some companies outside Spain would get less competitive in relative terms, and they would run into problems. When there is a shortage of money, someone is inevitably hit. The question is who and how.

The Euro in its present form is a new concept, and no one knows exactly what solutions will emerge, but there will surely be solutions for a lot of the people involved. For some people, there may be no solution, and their living standard will be permanently lowered - just like in other crises in countries with their own currency.

But let's assume for a moment, that the Euro is to be blamed for the current problems, how would one get rid of it?

That is a real problem. It is almost impossible to do so.

A country with a poor economic situation could be tempted to leave the Euro to be able to devalue. The problem is that it inevitably would be known in advance that they would leave, and before the cut-over, everyone would rush to remove their money from the poor country, as everyone would know that the currency was meant to lose value. People would transfer all their savings abroad. Companies would transfer their headquarters and capital abroad. The flow of capital would be immense. The intended effect, a loss of value of perhaps 5-10%, would extend to a drainage of the entire country's resources.

A country with a good economic situation could be tempted to leave, not to be dragged down with the falling value of the Euro. The problem here is the same, but with inverted values. Everyone would know in advance that the country would leave with the intention of pushing up the value. There would be an enormous pressure to buy assets in this country to take advantage of the appreciation to come. This would drive the currency so high, that the salaries in the rich country would become impossibly high. The companies would not be able to afford them, as their products would be too expensive to export, and mass unemployment would follow.

This means that it would be very difficult, perhaps impossible, for anyone to leave the Euro - at least for the purpose of fluctuating a local currency up or down.

Besides, there are all the practical costs we paid once when we joined the Euro, that will need to be paid again: transition of accounting systems and software, replacement of all slot machines (like parking meters, vending machines, ATMs), distribution of the new currency and elimination of the old currency (the Euro that is still valid in other countries) and so on.

In addition, for every country leaving the Euro, the old arguments are still valid. International travel would become more expensive, as we would have to start paying exchange fees again when going to neighbour countries. International trade would be more cumbersome and more expensive, as each transaction would have to pay for the risk involved. That would lower the trade volume, and one thing no economist outside North Korea denies today, is that trade is necessary to generate wealth.