The Euro: How a Common Currency Threatens the Future of Europe

Followers of my blog will be aware that I am no great fan of the European experiment (or at least the way it is being sold to the European electorate). The euro was fatally flawed from birth and we should take care never to forget this. The rather ponderous title of this blog has been taken from a new book written by no less an authority than Nobel Laurent Joseph Stiglitz. The Eurozone operating with a fixed exchange rate and single interest rates causes enormous imbalances that are very difficult to correct.

Quite simply, Germany is massively outcompeting its European cousins and now thanks in part to a relatively cheap euro is amassing the largest current account surplus in the world (even ahead of China and Japan). Germany accounts for around 75% of the Eurozone current account surplus which is running at a massive 8% of GDP. Externally, this can be managed but within the single currency it is a major problem as Greece and Spain have discovered.

Germany seems to take the view that its European partners should become a little more German in the way they run their finances. Understandably this doesn't go down well universally. German industry is essentially running a vendor financing scheme, with goods sold on tick via the European banking system. This works until the spending nation can no longer borrow. Austerity and economic slump is the current prescription to alleviate any blockages.

Stiglitz advocates an alternative solution which diverts blame from the victim. Instead, countries running persistent trade surpluses should face an EU tax. The likes of Germany would then be faced with the option of increasing spending or see automatic wealth distribution to their customer nations. Politically of course, this has a snow ball's chance in hell of being adopted.

The status quo ensures that regular squalls of euro-crises will erupt every decade or so. Politicians will, and probably rightly so, see the solution being greater EU integration rather than dismemberment. The next crisis will bring the mooted plans for a banking union to fruition. From there the steps towards a full fiscal union, political union and ultimately a fully-fledged federal state will follow. This will take time, a generation or two is most probable. Politicians who deny today the inevitability of this path are either the economically illiterate or knaves.

And the risk to this forecast? The risk is that I am an optimist.