Euro's Imminent Collapse

by John M. Curtis
(310) 204-8700

Copyright Feb.14, 2010
All Rights Reserved.                                

               When the European Union launched the euro in 1999, there was warranted skepticism about creating a common currency to compete with the United States of America.  Europe’s long tradition, dating back before the Roman Empire to the darkest days of human history, is one of disparate cultures and territorial wars.  Creating a common economic union was a good idea but carried impractical geopolitical political and economic risks.  Based largely on the Deutsche mark and French franc, the euro was supposed reflect the aggregate economic performance of at least 17 European countries with vastly different economies.  Northern European countries were supposed to lift the less industrialized south, like Greece, Portugal, Spain and Italy, historically weaker economies than Germany, France, Netherlands and Belgium.  Today’s crisis in Greece mirrors the euro’s failure.

            All countries signing onto the euro gave up national coinage rights, deferring instead to the Germany-based European Central Bank.  Europe’s poorer economies simply can’t keep pace with currency traders, bidding up the euro over the past 10 years to record levels against the U.S. dollar.  Before euro began to collapse, it stood, at the end of 2009, to replace the dollar as the world’s reserve currency.  European central bankers disparaged the U.S. Federal Reserve Board for managing a stubborn recession and banking crisis by printing more cash to keep financial institutions and state governments afloat.  Now the European Central Bank faces the same dilemma, either printing more euros, incurring more debt and bailing out failing states or watching the defaults of Greece, Portugal, Spain, Ireland and possibly Italy.  No European country on the euro can print currency to manage debt.

            Facing an “inevitable breakup,” economists at Paris-based Société Genéralé warn the mounting debt and possible economic failures in several eurozone countries anticipate an end to the euro as a common currency.  More wealthy European countries, largely in control of Europe’s Central Bank, notably Germany, France, Netherlands and Beligium, are not willing subsidize poor European countries facing mounting debt.  SocGen strategist Albert Edwards warned about the imminent collapse of the euro.  “My own view is that there is little ‘help’ that can be offered by the other eurozone nations other than temporary, confidence-giving ‘sticking plasters’ before the ultimate denoument, the break-up of the eurozone,” said Edwards.  Edwards believes that any help given to Greece delays the “inevitable” because the southern eurozone countries can’t function on an inflated euro.

            Harvard economics professor Martin Feldstein, former head of President Ronald Reagan’s Council of Economic Advisors, expressed skepticism about the future of the euro, believing it doesn’t work for most eurozone nations.  “There’s too much incentive to run up big deficits as there’s no feedback until a crisis,” said Feldstein, citing Greece's economic failure as proof that the euro isn’t working.  Britain’s Torey Party Leader David Cameron said the Greek debt crisis proves the failure of euro to manage Europe’s disparate economies.  “The eurozone is facing a full-fledged crisis.  The Greece episode has made it painfully clear how flawed the euro project was from the very beginning,” said Cameron, pledging, should he become Britain’s next prime minister, to never join the euro.  Since the Greek crisis emerged last month, it’s become more obvious the European Central Bank’s failure  

            U.S. and British currencies stand to gain by the collapse of the euro.  European union officials tried but failed to micromanage European economies, insisting that debt levels not exceed three percent of Gross Domestic Product.  For countries like Germany and France, it’s possible to achieve those targets but not poor nations with weaker manufacturing.  Germany, which manages the eurozone’s biggest economy, knows that it’s difficult with all the outsourcing and manufacturing in China, to maintain its preeminence.  Axel Webber, head of Germany’s Bundesbank, expects a possible contraction in economic growth in 2010, warning of a “doubledip” recession.  Webber knows that there are consequences to Germany’s economy for bailing out Europe’s poorer countries.  European Central Bankers, largely from Germany and France, don’t want to rack-up more debt.

            European Central Bankers face a major credibility crisis dealing with possible bailouts in Europe’s cash-strapped countries.  Financing more debt could hurt Europe’s more economically prosperous countries, contributing to what Webber sees a possible “doubledip” recession.  Before the European Central Bank commits to more debt, they must decide whether or not the 11-year experiment with a common currency is still feasible.  European Central Bankers, like the U.S. Fed, must be prepared to finance the dept of Europe’s poorer nations or fold their tent.  With a mounting dept crisis, Germany and France must decide quickly whether or not it’s time to admit defeat and return back to national currencies.  Poorer countries, like Greece, Portugal, Spain, Ireland and Italy can’t rely on the European Central Bank and desperately need coinage rights to manage their economies.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.