|Mario Draghi, ECB president, greets Mario Monto, Italian prime minister and finance minister, at the Ecofin council of EU finance ministers, Brussels, Nov 30, 2011. Philippe Maystadt, chairman of the European Investment Bank is in the centre.
Dr. Peter Morici:
Euro is a cruel hoax on Mediterranean nations; Federal Reserve assistance to
shore up Europe’s sagging banks may be good geo-politics but it is bad
economics. Only abandoning the euro, not printing money and Teutonic austerity,
will fix Europe’s banks and economies.
When introduced in December 1998, the exchange rate for the euro against the
dollar was set at the average of values for the currencies it replaced and then
left to float—find its value through supply and demand in foreign currency
Although EU treaties and bureaucracy did much to harmonize regulatory and social
policies across the continent, EU governments remain sovereign. The quality of
economic policy, pace of productivity growth and competitiveness evolved
differently across euro economies.
Over time, the euro became undervalued for Germany and other northern states—and
their exports became artificially cheap—and overvalued for Portugal, Italy,
Greece, and Spain—and their products artificially expensive. The northern
states became export juggernauts at the expense of Mediterranean states, who
endured chronic trade deficits.
Either trade deficits are financed by inflows of private investment or borrowing
abroad—private companies from Germany and other northern states building
factories with the euro earned exporting south, or Mediterranean economies
The investments never came—at least not in adequate size. For one thing, the
largest of the northern juggernauts, Germany publicly exhorts its industrial
prowess but privately manipulates domestic industrial policies to keep the lion
share of its manufacturing employment at home or selectively in Eastern European
states that fit its foreign policy. Public ownership in major industrial
enterprises and banks, and union participation on boards of directors help
enforce this quiet but effective mercantilism and is deeply rooted in German
German bragging about economic reforms and engineering genius is a great public
hoax. German productivity simply does not justify a 31 hour work week, and its
export is firmly rooted in an undervalued currency, virulent state-capitalism
Southern Europeans, much like Americans during the heady days of the last
decade, borrowed too much. Privately, they borrowed to finance homes and credit
cards from banks in Germany, France and foreign countries. Publicly, their
governments sold bonds to foreign banks to shore up social programs—not much
different in their scope and generosity from the rest of Europe—and to paper
over high private sector unemployment that is endemic in economies with
The solution being offered by Germany and other northern states are direct loans
to the Mediterranean governments, forgiveness of public debt held by private
banks and other private creditors, slashing public spending, and driving
unemployment above 15 or 20 percent to push down wages and make their economies
more competitive. The theory is they will attract more foreign investment if
their workers are paid less.
Germany, Holland and others are not about to let their industrial giants move
factories and jobs south, give up their large trade surpluses, and the pretense
that their gold plated job security guarantees and social benefits result in
super-human competitiveness—something their Anglo-Saxon brethren could never
accomplish. Hence, the Mediterranean states will never have the exports and earn
the euro to pay what they owe.
Essentially, European banks have two kinds of loans on their books—dollar
denominated debt, much of which is backed up by mortgages and loans to Americans
and corporations who need dollars to engage in U.S. and global commerce. And
euro-denominated sovereign debt and the loans to ordinary citizens, who face
financial stress in economies enduring recessions hastened and exacerbated by
the austerity demanded by Germany.
The Federal Reserve is lending the European Central Banks, who in turn lends
those funds to euro-country banks against their dollar-denominated loans. It
doesn’t fix the problem that those banks hold too much euro-denominated
debt—Mediterranean states bonds and private loans—that will ultimately fail.
The only sane option is for the Mediterranean states to reform their social
policies to promote more flexible labor markets and attract private investment,
drop the euro, remark public and private debt to the reestablished national
currencies, and let falling values for those currencies in foreign exchange
markets impose haircuts on creditors.
Devaluation would permit the failing economies to increase exports and repay
more of what they owe. The losses imposed on private creditors by devaluation
would be much less than the losses they endured if the EU continues the myth the
euro is essential to European unity.
Sadly, the economic maelstrom now imposed on Europe by the architects of German
mercantilism may destroy any political will to continue the EU when the euro is
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
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