Dr. Peter Morici: Europe’s single currency is a
bust. With unemployment reaching depression levels in the Mediterranean states,
time has long passed to negotiate an orderly return to national currencies.
Euro advocates argue a single currency is
essential for creating a unified continental economy, and the euro is falling
short of expectations, because monetary union was initiated without fiscal
union—namely, sovereign taxing and spending authority for Brussels. Those
arguments are little more than polemics from politicians, public servants and
pundits who have staked their reputations and careers on a failed economic idea.
Prior to the euro, Europe already enjoyed tariff free trade, common product
standards, and reasonably free migration of labor and capital. By Treaty of
Rome, Brussels has constitutional primacy in antitrust enforcement, called
competition policy across the pond. That permits the EU bureaucracy and courts
to nix business practices and national government policies than may frustrate
cross-border trade, much as the Commerce Clause empowers federal antitrust
authorities and courts in the United States.
Prior to the euro, a European Currency Unit, defined by a basket of major
currencies that could adjust in value to accommodate changing competitive
conditions, provided multinational businesses with a single monetary unit.
Businesses could obtain checking accounts in the ECU, as well as dollars, to
conduct pan European commerce.
After the introduction of the euro in 1999, productivity growth was slower and
prices rose faster in southern Europe than in Germany and other northern states.
Consequently, the more competitive north enjoyed growing trade surpluses and the
Mediterranean states endured deficits. Trade deficits can instigate
unemployment, and to create jobs and finance social programs, many Eurozone
governments borrowed too much.
The absence of Eurozone federal government, which could tax strong economies to
subsidize pensions, health care and other services in Greece and elsewhere, made
matters worse, but it was not determinative.
Without the ability to devalue a national currency to make their economies again
competitive, Spain, Greece, Italy and Portugal must either endure, for many
years, depression level unemployment to adequately push down wages and prices,
or receive, for many years, huge transfers of cash from Germany and other
northern states. Popular support could never be sustained for governments to
remain faithful to either path.
Government overspending did not create the mess in every troubled EU state. In
Ireland and Spain, overextended banks that collapsed in the wake of the U.S.
financial crisis brought down national finances.
During the 2000s, Spain enjoyed a boom in tourism and home construction, as
richer northern Europeans sought vacations and second homes in its warm climate.
Robust construction and property values provided Madrid with taxes revenues, and
unlike Rome and Athens, it enjoyed persistent budget surpluses.
Foreigners invested in Spanish bank securities, and the latter financed a hotel
and housing boom. In the wake of the global financial crisis, loans defaulted
and Spain’s banks nearly failed. Unlike the Federal Reserve, Spain’s central
bank could not print money to mop up the bad loans. Hence, Spain’s national
government had to borrow euro in international bond markets to save its banks.
With property values collapsing and tourism flagging, international investors
lost confidence in Spain’s sovereign debt, and now Madrid must impose wrenching
austerity and endure 25 percent unemployment to placate creditors.
European fiscal union won’t have helped Spain. Madrid would still have had to
borrow and cut other spending to bail out its banks, and a similar story can be
told for Ireland. Iceland, which suffered a similar fate, has its own currency
and is recovering much better than Spain or Ireland.
In the United States, fiscal union does not solve all problems
either—unemployment is much higher and fiscal challenges more difficult in some
states than others. However, workers are much more mobile than in Europe,
because the United States has a common language and more a homogeneous
educational system across the states.
A common culture and language is not something a Eurocrat can design or treaty
divine. Either a common currency makes sense at first sight, or all the
stitching in time won’t make it right.
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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