The world may be keeping its fingers crossed on Greece, which has just about managed to elect a fairly pro-austerity frontrunner, but it’s time to uncross them: for the euro will not survive. We should take that as a certainty, not something that can be avoided. No amount of blundering with monetary and fiscal unions can change this reality.
The truth is the euro is not about Greece anymore. It never was. Greece was merely the first country to awaken everyone to the fundamental flaw at the heart of the common currency misadventure. It was the canary in the coalmine. The euro was created out of thin air – without common fiscal and monetary policies and a central bank to back it all up.
In fact, one can go further and affirm that only a single sovereign state can ever ensure a single currency. Since Europe is not one sovereign country but an aggregation of several sovereigns, each marching at its own speed, a common currency is an anachronism. It was always bound to fail.
Why? Because not all countries are equally competitive. When you have different countries with different currencies, loss of competitiveness in one is compensated by a fall in the exchange rate. This means you can export more – like India can now do, since its rupee has fallen. If you are in the same currency, you can’t. The only way to improve your competitiveness is to cut your costs (wage costs, pensions) – which is what Greece, Spain, Italy, France, etc, are doing and shuddering while it happens.
Now, let’s see what’s happening in Greece. It has a huge debt load, to repay which it has to cut government spending, wages and prices. But when Greece does this, growth slows, tax revenues fall, and the debt becomes more difficult to repay. Can you pay a bloated credit card bill, one that is more than a year’s salary, and where interest keeps accumulating every month, if simultaneously your salary keeps falling every month?
This is what Greece is being asked to do – and why it can’t pull off this magic.
If Greece had been a separate country, it would have devalued its currency. This would make its exports competitive, and more tourists would flock to Greece (since its currency is cheaper), allowing it to earn foreign exchange. The devaluation would, of course, bring inflation (where your money buys less), but this allows people to adjust to austerity without the psychological impact of sharp wage cuts. Your wages merely start buying less than before, bringing in its own indirect austerity. But since growth remains firm, there are revenues with which to repay debt.
Without having a different currency, there are only four ways in which a country can become competitive: it can export labour (migration), it can practice austerity and become poorer (which is the choice being offered to Greece), it can devalue and inflate its way out of trouble (as inflation rises, the real value of debt shrinks), or it can ask for grants from the better off – as Austan Goolsbee, economics professor at the University of Chicago, wrote recently in The Wall Street Journal.
These things can really happen only in a sovereign country where there is one government which can guarantee that most of these four conditions are met.
If the eurozone were one country, Greeks can flee oncoming poverty by moving to where there are better jobs. Or, the richer areas (Germany, northern Europe) can make cash transfers to their poorer brethren. This is what happens in India – more taxes are collected from states like Maharashtra and Gujarat, and spent in poorer states like the north-east or Bihar and Orissa.
This is what lies behind global and international calls on Germany to create a common central bank and/or bankroll the debts of the weaker states. The world wants rich Germany to pay for poor Greece – not to speak of the rest of southern Europe.
Germany, for its part, has been calling for a reduction in eurozone countries’ sovereign powers, but this is most unlikely to happen. Given Europe’s unwillingness to coalesce into one common political and economic entity, one can presume that it can’t solve the euro crisis.
If Europe does not become one sovereign, with political, fiscal and monetary power being centralised in one executive, we should kiss the eurozone goodbye.
The paradox is the European Union (EU) was always a political project intended to prevent its constituents from ever going to war. But what EU actually succeeded in creating was an economic union without a political convergence.
The creation of the euro was thus a prime act of folly. It is doomed to fail – unless Europe decides to become one sovereign entity. Any bet on the euro means Europe will become one country – or something like it.