The Euro Disaster

A transnational single currency harms both rich nations and poor ones.

Rich Lowry
Friday, August 19, 2011

The country’s op-ed pages have been full of condemnations of the dysfunction of American politics, what with all the populist clamor and partisan disagreement.

So, a thought experiment: What if we were governed by a sophisticated transnational elite that operated outside of normal political channels as much as possible and, sharing similar values, forged compromises relatively easily? What if the elite were high-minded and visionary? What if they succeeded in doing “big things”?

In Europe for the past couple of decades, this hasn’t been a fanciful hope, it’s been a reality. A political and financial overclass engineered the adoption of the euro, based on one of the world’s most foolhardy delusions since the fall of the Berlin Wall: that you can have a common currency without a common country.

The euro fueled the sovereign-debt crisis that has brought Europe to the brink and threatens to take the American economy down with it. Our double dip may come courtesy of people named Jacques and Wim who were brilliant — and desperately wrong.

As the euro began to become a reality in the 1990s, the chief economist of the German Bundesbank rudely pointed out that “there is no example in history of a lasting monetary union that was not linked to one state.” But what is history compared with the dream of guys around a conference table sipping Evian?

In his excellent primer on the euro crash, Bust, Matthew Lynn notes that there were two answers to this objection. One was that the euro would be the forerunner to a unified Europe — in other words, create the currency first, worry about the nation later (details, details). The other was that Europe was an “optimal currency area,” where economic efficiency would be served by a single cross-border currency.

As the euro expanded to the periphery of Europe, the currency area got steadily less optimal. The euro foundered on differences of national culture and interests. The Swabian housewife — once invoked by German chancellor Angela Merkel as a symbol of austere common sense — does not live in Athens. She never will.

The euro nonetheless made it possible for countries like Greece and Portugal to borrow at essentially the same low rates as Germany under the illusion that they were just as safe. It’s one thing for Germany to borrow at German rates, since fiscal tough-mindedness is practically the country’s state religion. It’s quite another for Greece, with an ingrained habit of spending what it doesn’t have, to do so.

True to form, Greece lied about its fiscal indicators to get accepted into the euro, and kept right on lying once it joined the currency. Its national motto could be a paraphrase of the famous Animal House line: “You messed up, you trusted us.”

The low costs of borrowing in countries like Greece spurred massive binges by consumers and government. The bubble felt good on the way up, but it’s been brutal on the way down, and Europe — which is to say Germany — is ultimately on the hook for all the unsustainable debt.

Under traditional rules, Greece would devalue its currency in its desperation to get out of its current predicament. The euro makes it impossible. The Greeks have accepted a crushing deflationary program imposed by the EU that makes growth impossible and probably only delays the inevitable default. And the contagion is spreading to Spain and Italy, raising the prospect of a crisis in countries too big to bail.

The euro locks them all into a German-approved currency despite the fact that only one of them is Germany. As Ambrose Evans-Pritchard writes in the Daily Telegraph, “These countries were thrown together into monetary union by high-handed politicians before there was any meaningful convergence of productivity, growth patterns, wage bargaining, inflation proclivities, legal systems, or sensitivity to interest rates.”

The handiwork of the splendidly effective euro-crats should be undone. Greece is a basket-case country. It deserves a basket-case currency. Bring back the drachma.