One decade later, the euro is in serious trouble. The problems result
from the recent economic crisis which have badly affected the economy of
Greece, one of the countries of the eurozone. Analysts doubt whether the
government in Athens is able or willing to address Greece’s financial problems.
If not, the other 15 nations using the euro will suffer the consequences, which
is something they are not likely to accept.
Thomas Mayer, the chief economist of Deutsche Bank, warned last week:
“The situation is more serious than it has ever been since the introduction of
the euro. […] If the Greece situation is handled badly, the Eurozone could
break down, or face major inflation.”
The problems of the euro affect the entire world. The EU currency was
not introduced because of economic considerations, but because the European
Union is pretending to be a genuine state and states are expected to have
single national currencies. Hoping to become a powerful political force in its
own right, the EU adopted the euro as the common currency of some 327 million
Europeans, so that the currency’s economic power would prefigure the political
power to be.
With Greece facing bankruptcy, the fears about Greece’s financial
situation has led to a drop in value for the euro. Last week, the finance
ministers of Germany and the Netherlands – the two eurozone countries which in
pre-euro days had the strongest currencies in the EU: the German mark and the
Dutch guilder – announced that they will not help Greece solve its problems.
Polls indicate that 70% of the Germans oppose using their taxes to bail out
Moreover, the German economy has also been badly affected by the crisis.
Last year, Germany’s GDP fell by 5%, the biggest drop since the war, with a
drop of 15% in exports and 20% in sales of German manufacturers. The German
people are not prepared to lift countries such as Greece, Romania, Spain,
Portugal and Ireland out of the recession at its own expense.
There is also a lot of anger towards the Greeks in the other EU
countries: for some years Greece seems to have covered up its bad economic
performance by officially presenting better economic figures than was the case.
The promise of the Greek government to reduce Greece’s budget deficit from
12.7% of GDP in 2009 to 2.8% in 2012, is being met with scepticism. Many doubt
whether the government in Athens will be strong enough to resist the domestic
pressure from the powerful trade unions against the radical deficit-cutting
efforts which are needed, while others doubt that the Greeks will refrain from
manipulating the economic data again.
Unwillingness to help the Greeks is huge within a eurozone currently
facing an unemployment rate of 10% of the workforce, the highest figure since
the single currency was introduced eleven years ago. Under EU rules, however,
all the 27 member states of the EU, not just the 16 member states of the
eurozone, are obliged to help the Greeks if the EU decides to bail them out.
Article 122 of the EU Treaty, which went into force last December, states: “Where
a member state is in difficulties or is seriously threatened with severe
difficulties caused by natural disasters or exceptional occurrences beyond its
control, the council of ministers, on a proposal from the European Commission,
may grant, under certain conditions, Union financial assistance.”
This decision is taken on a majority vote. Consequently Britain, which
always refused to join the eurozone, might be forced to help save the euro. The
British press has already reported that if an EU rescue fund for the Greeks
matches the Greek budget deficit, and if the EU decides that member states have
to contribute in accordance with their own share of the total EU economy,
Britain might be forced to pay a £7 billion bill to bail out Greece –
British Eurosceptics fear that if Greece, which represents 3% of EU GDP,
is bailed out, other eurozone countries facing financial difficulties (Spain,
Portugal, Italy) might claim the same treatment. This, they say, would saddle
Britain with a bill of £50 billion to save a currency in which the Brits have
Even though European public opinion is opposed to a bailout plan for the
Greeks, Irwin Stelzer wrote in The Wall Street Journal recently that he
expects European politicians to present just such a plan. “There is so much
political capital invested in the euro by the political class,” he wrote. “that
even the stern and parsimonious [German Chancellor] Angela Merkel will in the
end contribute to a bailout fund if necessary.”
However, there also are indications to the contrary. Greek politicians
might feel that the only way to avoid civil unrest in Greece may be to drop the
euro and re-establish their own national currency, the Greek drachme. This will
allow the Greek government to devalue the currency in order to stimulate
exports and economic growth – a political-monetary tool which Athens lacks if
it remains in the eurozone. It seems that some people at the European Central
Bank (ECB), which controls the euro, are in favor of such a move.
On Jan. 17, Ambrose Evans-Pritchard wrote in the London Daily
Telegraph that at the ECB headquarters in Frankfurt the legal ground is being
prepared for a euro break-up. A major problem, however, appears to be that once
a country has accepted the euro it cannot get rid of it unless it leaves the EU
altogether. “This is a warning shot for Greece, Portugal, Ireland and Spain. If
they fail to marshal public support for draconian austerity, they risk being
cast into Icelandic oblivion.” Apart from Britain and Denmark, two countries
which obtained opt-outs in the EU treaties, all EU member states are obliged to
join the eurozone or peg their currencies to it. Former IMF analyst Desmond
Lachman is quoted in CityAM warning: “There is every prospect that within two to
three years...Greece’s European membership will end with a bang.”
reports, however, that the dominant view in financial circles in the City of London
seems to be that “if a rescue [a bailout of Greece] turns out to be necessary,
a rescue will be mounted.” This is a bet, says Evans-Pritchard, that Berlin
will do “what it did for East Germany: subsidise forever.
It is a judgment on whether EMU is the binding coin of sacred solidarity or
just a fixed exchange rate system like others before it. Politics will decide.”
Which brings us back to Milton Friedman. When politicians decide to rule economic and monetary issues, the results are usually catastrophic.