real economics

The Euro seems ready to destroy itself because like the Gold Standard, it is not flexible enough to meet the needs of a modern economy.  Of course, this absurd rigidity is a conscious decision by the right-wing nuts who run the big financial institutions in Europe.  It is not an intrinsic failure built into the idea of a Europe-wide currency itself.

Austerity Fails in Euroland: Time for Some Deficit Easing?

by Ellen Brown  webofdebt.com

Global Research, December 22, 2010

“Doubtful it stood, as two spent swimmers that do cling together, and choke their art.”

--Shakespeare, “Macbeth”

The Greek bailout was supposed to be an isolated case, a test of the EU’s ability to quarantine an infected member, preventing it from spreading “debt contagion.” 

But that was before Ireland failed. Ireland was the poster child for how to conduct a successful austerity program. Unlike the Greeks, who were considered profligate spendthrifts, the Irish did everything their creditors asked. The people sacrificed to pay for the excesses of their banks, but still the effort failed. Ireland was the second domino to fall to an IMF/EU bailout. On December 17, Moody’s Investors Service rewarded it for voting to accept the “rescue” package with a five-notch credit downgrade, from AA2 to BAA1, with warnings that further downgrades could follow. 

Spain is rumored to be the next domino poised to fall. If it falls, it could bring down the EU. 

A Design Flaw in the Euro Scheme?

Richard Douthwaite is co-founder of an Irish-based economic think tank called FEASTA (the Foundation for the Economics of Sustainability). He reports that the collective deficit of eurozone countries was a very acceptable 1.9% in 2008. It shot up to 6.3%, exceeding the cap imposed on EU members (3% of GDP), only in 2009. This spike was not due to a sudden surge in government spending. It was due to the global financial crisis, which shrank the money supply globally. Douthwaite writes:

[A] shrinking money supply means shrinking business profits simply because there is less money available to appear in corporate accounts at the end of the year. This means less tax is paid.

When taxes go down, revenues go down; but budgets don’t. 

In an article called “Understanding Modern Monetary Systems,” Cullen Roche explains that the Euro system is the modern equivalent of the gold standard. Both are “revenue constrained.” Countries on these restrictive systems cannot expand their revenues because there is nowhere to get the money. They cannot get more Euros except by borrowing from each other, and all the member countries are in debt. In June 2010, 26 of 27 EU countries – all but Luxembourg -- were on the “debt watch list” for exceeding the 3% cap. Euros can get shuffled around to keep the game going; but in the end, as Shakespeare said, the eurozone countries are “as two spent swimmers that do cling together,” pulling each other down. 

Douthwaite writes:

[I]ndividual eurozone countries [cannot] create money out of nothing by quantitative easing. Only the European Central Bank has that power but it has not yet used it to inject money into the system without withdrawing an equal amount. Consequently, every cent in use in eurozone economies has to have been borrowed by someone somewhere, at home or overseas. As a result, while countries with their own currencies can handle a debt-to-GDP ratio of over 100% because they have the tools to do so (Japan’s is approaching 200%), countries using a shared currency must keep well below that figure unless they can agree that their shared central bank should use its interest rate, exchange rate and money creation tools in the way that a single country would.

Roche comments:

The Euro system, which is also a single currency system (like the gold standard) adds significant confusion to the current environment and is often confused as a flaw in fiat money. In reality, the Euro proves why single currency systems are inherently flawed. 

By a “single currency system,” Roche means multiple nations sharing a single currency (whether Euros or gold). Governments need the ability to expand their own money supplies as required to meet the needs of their own economies. Without that flexibility, they are reduced to trying to balance their budgets through brutal austerity measures. In a November 19th article in the UK Guardian called “There Is Another Way for Bullied Ireland,”Mark Weisbrot observed:

The European authorities could . . . allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.

Instead, the European authorities are trying what the IMF . . . calls an "internal devaluation". This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labour costs. . . .

Aside from huge social costs and economic waste involved in such a strategy, it's tough to think of examples where it has actually worked. . . 

If you want to see how rightwing and 19th-century-brutal the European authorities are being, just compare them to Ben Bernanke, the Republican chair of the US Federal Reserve. He recently initiated a second round of "quantitative easing", or creating money – another $600bn dollars over the next six months. And . . . he made it clear that the purpose of such money creation was so that the federal government could use it for another round of fiscal stimulus. The ECB could do something similar -- if not for its rightist ideology and politics. more