Unworkable And Unreformable——Why The Euro Can’t Survive Another Downturn

By Jeremy Warner at The Telegraph

Is there no limit to the economic pain Europeans are prepared to endure in defence of the wretched euro? Apparently not; despite the brinkmanship and bravado, even Greece’s notionally radical left prime minister, Alexis Tsipras, eventually opted for continued membership of the single currency, and the austerity that goes with it, over economic self-determination and a plausible path back to growth and full employment.

Barring last-minute political upsets, a third Greek bail-out will shortly be implemented. Few, even among those who have agreed the latest rescue, believe it provides the basis for lasting solutions, even if later concessions include permanent debt relief.

As the political philosopher John Gray recently concluded in a compelling analysis of the single currency’s fate, “unworkable and unreformable, the euro can only produce recurrent and worsening crises”.

Yet the euro as it now stands will eventually die not of the financial traumas that first threatened its existence, but of political contagion, with the single currency paradoxically spawning exactly the same kind of resurgent nationalism, popular anger and political instability it was designed to eradicate.

For the moment, however, Europe’s disastrous experiment with monetary union is proving surprisingly resilient. With each recurrent crisis, just enough is done to hold it together. Delusional faith in the euro being in some way Europe’s unavoidable and manifest destiny is not confined to the policymakers with a vested interest in trying to keep it alive. It is shared by a clear majority of Europeans.

I’ve recently returned from a holiday in Italy where I was astonished to discover that after seven long years of more or less perpetual recession, support for the euro remains pretty much rock solid among otherwise rational, well informed people.

As it happens, Italy is one of only two eurozone members – the other being Cyprus – where according to polling by the European Commission a majority of public opinion believes the euro has been a destructive force. Bizarrely, even the Greeks seem to think it has been a good thing for their country. More counter-intuitively still, faith in the euro is at its strongest in Ireland, which has also suffered greatly at the hands of this grand folly of European policy-making.

Reasons for this support vary greatly from one country to another, and in many cases are much more about politics than economics. Small countries tend to view the euro as protection from speculative financial attack, even though the examples of Switzerland, Singapore and a host of other tiddlers demonstrate that it is perfectly possible to be both small and economically robust. Supposed geo-political security, particularly for Eastern European states still regarded by Moscow as by rights part of Russia’s sphere of influence, provides a further reason for sheltering beneath the umbrella of currency union. Believe it or not, for many Europeans, the euro still represents modernity, or freedom from the forces of instability that increasingly gather at the EU’s borders.

And then there is middle-class self-interest. Even in Greece, most people who want to be are still in a job, and therefore have some kind of an interest in safeguarding the value of their earnings and assets. Greeks have grown fond of the German exchange rate the euro gives them. Reintroduction of the drachma would immediately halve the external value of their assets and savings.

But perhaps the more potent reason is the one suggested by Mr Tsipras last week in defending his decision to accept the terms of a third bail-out. “We took the decision to remain alive instead of committing suicide”.

The unfortunate truth is that currency unions are much easier to join than to leave. Countries that give up their monetary sovereignty essentially become locked in; rightly or wrongly, the economic consequences of leaving are seen as even more ghastly than the costs of staying. In Greece’s case, these costs seem to have become intolerable; to be imposing yet more austerity on an already severely depressed and highly indebted country is almost certain to be counter-productive, however much supply-side reform it is accompanied by.

Don’t be fooled by recent GDP figures showing a 0.8pc second-quarter rebound in the Greek economy. This was an entirely deflationary story. In nominal terms, the Greek economy continued to shrink precipitously.

How much of a respite will the latest bail-out buy? Not much of one, is my guess. There is growing evidence that something quite nasty is, or was, happening in the world economy. Everyone knows about the Chinese slowdown, and the knock-on consequences this is having for Western companies dependent on this once fast-growing market. Less well appreciated is that this slowdown is a global phenomenon.

One key sign of it is the latest Empire State Manufacturing survey, which shows a quite dramatic decline in business activity for New York manufacturers. The headline general business conditions index tumbled 19 points to -14.9 this month, its lowest level since 2009. The new orders and shipments indexes also fell sharply, to -15.7 and -13.8 respectively, pointing to marked declines in both orders and shipments.

This might be no more than a temporary, regional blip, yet it is also indicative of a new and worrying trend in the global economy, increasingly a two-speed affair where service sectors in growing economies such as the US and Britain are bounding ahead, but trade, goods and capital investment are again weakening fast. Such a combination is unprecedented in recent decades for a global economic expansion, Chris Watling of Longview Economics points out, and highlights the lack of broad-based momentum in any recovery that might be going on.

If the global economy is indeed about to enter another downturn, then we can expect the eurozone crisis to resume quite quickly in some shape or form. To survive, the eurozone desperately needs a recovering world economy. It is not at all clear it is going to get one.

Nor is it at all clear that the political will to go further in holding the eurozone together any longer exists. There is a sense in which the third Greek bail-out is a last throw of the dice. If it doesn’t work, Germany is very unlikely to back further efforts to support the more fragile eurozone economies. It is only through gritted teeth that Germany’s finance minister, Wolfgang Schauble, has been persuaded to back the latest machinations. He’s made it as plain as a pikestaff he doesn’t believe in them.

Misconceived from the outset as a monetary union unsupported by shared political and fiscal arrangements, the euro has always been a deeply flawed endeavour. These deficiencies were greatly compounded by overly moralistic imposition on debtor nations of fiscal austerity and hard money policies. In the absence of a change in mindset, which even now seems very unlikely and has no popular support in the German core, it is virtually impossible to see how the single currency can survive the next big downturn.

Source: Unworkable and unreformable, the euro surely cannot survive another serious downturn – Telegraph