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Dr Peter Morici: Standard
& Poor’s was correct to downgrade the credit ratings of France and seven other
Eurozone governments, but wrong to affirm Germany’s AAA status. The euro will
inevitably collapse and chaos will follow, endangering even the strongest
Profligate government spending surely caused many problems now besieging
Mediterranean and French governments, but investors understand austerity alone
won’t save them from default and the costs of refinancing and insuring sovereign
debt have risen significantly.
Slashing government spending and raising taxes are pushing the Club Med and
French economies into deep recessions, and tax revenues will not be enough to
meet deficit reduction goals. Only rapid improvements in exports could get
those economies going, but proposed labor market reforms will not improve
competitiveness quickly enough. And those reforms will be tough to implement
with unemployment above 10 or 20%.
Sooner or later, Greeks, Spaniards, and Italians will ask, if the euro is
supposed to boost prosperity why are wages falling, taxes rising and
unemployment so high? Political upheavals will usher in governments promising
to quit the euro and remark sovereign debt to reinstituted national currencies.
Capital flight and exchange rate depreciation will follow, imposing huge losses
on creditors—European sovereign bonds, as valued in dollar or yen, will fall
Once Italy quits the euro, others will follow, investors holding bonds issued by
the European Financial Stability Facility likely will get stiffed. They would
have been smarter to purchase Confederate currency for its collector value.
In 1999, the euro’s value against the dollar was initially set at the average
for the currencies of participating nations and left to float in currency
markets, but European leaders failed to reckon with a changing world.
Rapid growth in China, India and Brazil, and even Poland opened vast
opportunities for German and smaller northern states’ technology-intensive
exports and financial services, but imposed new competition on less innovative,
more-labor-intensive industries concentrated in France, Italy and other southern
Over time, the euro became undervalued for Germany and other northern states and
overvalued for the Mediterranean economies and France. This permitted German
industrialists to export like supermen, while unemployment rose and became more
permanent in the South and France.
With national currencies, exchange rate depreciation would make the South and
France more competitive—it would make imports more expensive, boost exports and
create jobs. However, sharing a common currency with most of Europe, German and
other northern economies export strength kept exchange-rate adjustments from
happening. In the South and France, governments stepped in to shore up
employment and incomes, spent and borrowed too much, and now sovereign debt
burdens are impossible.
Also, when the European leaders created the euro, they did not reckon with the
fact that Mediterranean and French voters see social democracy through different
lenses than their northern brethren.
In varying measures, voters in Germany and other northern states more greatly
value a robust private sector and expect governments to maintain a strong safety
net. Whereas voters in France and the South value a robust government and expect
the private sector to pay for it.
As President Obama’s tenure demonstrates, the latter view is a prescription for
slow growth, job flight and high unemployment, and inevitably requires huge
government deficits to keep the whole system from coming unglued. And as
Mediterranean states show, and France is about to exhibit, the whole system
becomes unglued anyway when investors start demanding much higher interest rates
on government bonds.
Without a euro, Mediterranean and French governments would be able issue debt
denominated in their domestic currencies, rely more on domestic banks, and print
money. The combination of inflation and exchange rate depreciation would lower
living standards but nothing like the draconian conditions now being imposed by
German mandated austerity and bailouts.
In the end, a common currency is just paper and can’t compel changes in culture
that cause the French, Italians and others to value security and early
retirement over German prosperity.
Under these conditions, the euro can’t work, and German and French government
resistance to an orderly return to national currencies requires that instability
and huge investor losses follow the collapse of the common currency. In that
chaos, not even Germany, Holland and other northern states are certain to
prosper, and their ability to avoid huge deficits and default is hardly certain.
These systemic risks require that no Eurozone state is worthy of a triple A
Professor, Robert H. Smith School of Business, University of Maryland,
A Greek Default Looks Unavoidable But Leaving the Euro Is Not an Option: VP; Wim Boonstra, executive Vice-President at Rabobank Nederland, told CNBC, "it is clear to me that without a very strong, large debt write off Greece cannot come out of this problem":
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