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Dr. Peter Morici: European
efforts at economic integration have not delivered sustainable prosperity in
poorer nations like Greece and Portugal. Instead, these have left Mediterranean
governments teetering on bankruptcy and at the mercy of Germany and other rich
states who exploit European unity to live well at the expense of their poorer
The 1992 Maastricht Treaty, which considerably harmonized product and safety
regulations and methods of taxation across Europe, was supposed to remove untold
barriers to growth. It didn’t, because it did not moderate European labor laws
and social programs that discourage individual ambition and investment.
The euro, created in 1999, floats against the dollar and yen, and its value
reflects an average of the competitiveness of its entire membership. This leaves
higher productivity economies like Germany with an undervalued currency and
trade surpluses, and lower productivity economies like Greece with an overvalued
currency and in constant need to borrow from foreign investors.
With Maastricht and the euro, German manufactures and technology became more
valuable in a more integrated European market. However, Greece, Portugal and
others are not able to use their lower labor costs to capture assembly plants to
the degree, for example, that the U.S. South attracts automotive and high-end
Moreover, Germany and other rich states continue subtle forms of protection that
discourage outsourcing even to other EU member states, and this frustrates the
EU single market promise to more effectively equalize employment opportunities
and prosperity between the prosperous core and southern Europe.
Affluent Germany, unburdened by an obligation to share tax revenues with poorer
EU states, provide generous pensions, gold plated employment security and
jobless benefits, and the shortest workweek on the planet. Meanwhile,
governments in Greece and other poorer EU states struggled to keep up, and
borrowed extensively from banks in Germany and France and other rich countries
to keep up.
Now unable borrow anymore in private markets, Greece and other poorer
governments are forced to seek emergency loans and concessions from richer
states and private creditors. They are being compelled by Germany and others to
slash government spending and social benefits, dramatically raise taxes and sell
off public assets.
None of this will work, because the private sectors of these economies are so
dependent on government spending to maintain employment that austerity will only
cause more layoffs among both private businesses and public agencies, thrust
their economies into deep recessions, and significantly reduce, rather than
enhance their governments’ capacity to tax and pay interest on their debts.
Moreover, to service their restructured debts, poorer governments must pay
richer governments and foreign creditors in euro, and this will require their
economies to accomplish significant trade surpluses by developing new export
industries. This would require Germany and the rich countries to let
manufacturing activities and jobs migrate south that they heretofore have
blocked form moving to lower wage economies.
With a single currency, building new export industries would require rather
substantial cuts in Greek and other poorer country wages, and for the Germans
and others to relinquish subtle forms of protection that guarantee them higher
wages and favorable trade balances.
It is doubtful Greeks are willing to let their economy sink to third world
status to perpetuate the myth of European unity. As important, the Germans too
much like lecturing the world about the virtues of Teutonic thrift and
efficiency to let go of mercantilism, and to let debtor nations accomplish trade
surpluses and obtain the euro needed to repay their debts.
If Greece had its own currency, it would still have had to reduce government
spending, increase taxes and cut wages—but not by nearly as much as richer EU
states and the ECB now demand—because Greece could also devalue its currency
against those of richer EU economies to make its exports more competitive,
accelerate growth, and increase debt servicing capacity.
In the end, necessity will trump pan-Europeanism. The Greeks will default on
their debt and if they are smart, eventually dump the euro.
Professor, Robert H. Smith School of Business, University of Maryland,