Since I'm traveling in Greece on vacation I have been reflecting on the momentus decision made by European countries to abandon their national currencies for the Euro. I understand the geopolitical rationale behind the move, and yet it is hard to see how this is a good thing for most of these nations (Germany aside) - at least as constructed in its current form.
The Euro is a currency union with a central monetary system (central bank) but no fiscal union (every country taxes and manages its own spending). This is very much like the 50 US states giving up the right to have their own currencies, only they must also be responsible for their own social security, medicare, military and all other costs of government functions. They must raise sufficient taxes to pay for all this since they have no ability to simply issue currency to pay for these things. They must now balance their budgets (or borrow to cover deficits). Virtually all of Europe gave up the standard monetary system of all nation-states for the hope of a stronger currency (Germany likely hoped for a weaker currency so they could export more - which they have), and a lasting peace on the continent.
In 2011, S&P downgraded the US dollar and around the same time there was much handwringing about the US becoming the next Greece. Afterall, our debt is now over $17 trillion, an astronomical number that just sounds really scary and irresponsible, and even our president had made statements about the debt being unsustainable.
But is it?
Remember that a currency-issuing nation with a floating exchange rate has no constraint on its ability to create its currency. And just as importantly, the "sector balance equation" tells us that this so-called debt is actually a reflection of the private and foreign sector's desire to save that currency. We really have $17 trillion in savings account balances.
It appears S&P, after completely failing in their credit rating business and being complicit in the mortgage-backed security fiasco that cost the US economy trillions of dollars (and therefore added to our debt), has further shown their inability to understand simple monetary operations. The US is not Greece (or France or Spain or...)
So what has Greece done?
By abandoning their own national currency, Greece must earn foreign currency in order to pay for things that it used to be able to pay for by issuing Drachma. It can do this by a balanced budget, or if wants to spend more than its private sector earns in a given year, it must go more into debt or become a net exporter. Afterall, this has worked great for Germany, right?
Can everyone net export? Of course not!
For every exporter there must be an importer. Germany needs Greece to be a net importer so it can keep selling Mercedes cars to their taxi drivers. So Germany wants to drive Greece's wages and standard of living into the third world so Greece can become a low-cost producer and earn more Euros from abroad. That's not going to happen for a host of reasons, so Greece lives with devastating depression-level unemployment. And this is obviously counterproductive.
And what does lower wages in Greece mean for Germany - less disposable income and therefore less purchasing power. Europe is only now beginning to wake up to the fact that they need to increase demand (people buying things) in order to increase sales and therefore growth and therefore help pay their debts. Why is this so difficult to grasp? Weimar casts a long shadow over the German fiscal psyche but they learned all the wrong lessons from that tragedy.
Greece could try to borrow more, but unlike the US (and UK, Canada, Japan etc.), their debt is in a currency they do not issue. They must earn the Euros to pay back the debt, so we're back to square one.
Now many simply view the Greeks as the classic lazy, irresponsible, corrupt southern Mediterranean population, living beyond their means. And certainly, there has been corruption. But does every nation need to become their world's laborers to have quality of life? Can the fruits of productivity be enjoyed by a people? Do we all have to become slaves to debt and ever-more expensive things so that the gains of productivity are always elusive, while the world's wealth accumulates in the accounts of the financial sector like Smaug's lair?
There is a way forward for Europe but it must involve restoring use of currency for the good of people. Allowing the central bank to issue currency to certain levels for each nation would be a good start, and other reforms would allow the currency union to operate more like the US-states model. A job guarantee should be a priority, given the criminal unemployment levels that the EU leaders have forced on the Eurozone.
Let's hope Europe's population can see the right path forward and push their leadership for the change that will restore hope. The road they are on now has been trodden before and its path often leads to social disorder or war. It's not too late to make the turn.
