Modernizing the Euro

As Merkel and Sarkozy raise the poker stakes for a more stable euro, international bankers are folding. The combination of heavy laden debt with a crisis of confidence is proving unsustainable. Could or should the euro survive?

The principal pillars supporting the euro are buckling under the weight of unsustainable debt from their weakest members.  Countries such as Greece, Italy, and Spain are faced with a near impossible task of competing against members with more efficient economies.  They are also borrowing funds in a common/strong currency (euros) at significantly higher interest rates than their norther brethren.  Without the ability to devalue their currency to instigate export growth, these less efficient economies will only become weaker not stronger.

Based on lender stipulations, primarily from German sources, debt laden countries must convince their voters to accept lower wages and pay higher prices.  Understandably, elected leaders from both sides worry about inciting social unrest and potentially losing their own jobs.  They are also concerned of losing their best and brightest workers to better paying jobs elsewhere, a serious situation that could potentially impact their future generations of indigenous leaders.

Some industry experts suggest the creation of a federalized central banking authority that would be accountable for the aggregate interest of all member countries.  As it stands today, the decision makers responsible for the euro’s survival are only accountable to their own local voters and have no incentive to consider a common solution.  As though apathy was not enough of a deterrent for progress, EC voting representation is also lopsided.  Rather than being slated by population size, decisions are voted upon by membership, hence, a vote cast by the island of Cyprus is equivalent to a vote from France.  Other experts suggest giving the ECB (via the IMF) greater authority to buy up depressed bonds from anxious bondholders using freshly minted euros, but the potential inflation caused by printing money and the inevitable interest rate increase that would follow, could trigger a greater recession.

A Viable Solution: In view of the obsolete political infrastructures among members,  European leaders should focus on increasing the valuation of their political currency through radical institutional reforms combined with a moderate devaluation of the euro to help monetize the debt load.  This solution could be achieved by having three different exchange rates for the euro currency that would reflect the level of sovereign debt by each member.  The most devalued rate would be extended to new potential EC members who would early on recognize the authority of a federalized ECB.  This modernized approach would not only strengthen the euro’s survival but also fill its pipeline with better prepared future EC members.