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 northern 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.

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2 Responses to Modernizing the Euro

  1. Tom Turner says:

    I’m not sure it is a viable value proposition. I think each member state using the Euro needs to understand where it adds value, where they are strong and adopt a model that reflects their strengths. The true value of the Euro is the stability it offers spread across a diverse portfolio of states for the less stable economies, while keeping the Euro competitive for global exports for the bigger users such as Germany. If the Euro nations were to adopt what you have suggested above, it would make a BMW car even more expensive and so less attractive to the export market. German exports already have to shoulder a heavy cost burden due to high cost of living, to add the impact of the above, would be damaging to potentially what is keeping the Euro afloat today. Greece, Spain, Portugal etc, need to go through the pain following bad fiscal decisions, remove waste and cencentrate on becoming streamlined and align their spending to what their micro economies are based on. They are feeling the pain, yes. But no amount of rebaselining of currency is going to fix the problem. If they don’t change what they do, it will simply be short term financial trickery, with the same long term outcome, but maybe without the strength of the stronger economies to support them. Personal opinion. Thanks

    • Tom Kadala says:

      Tom, many thanks for your comments. It is always a pleasure to hear from my readers and exchange opinions.

      Your comments struck me as being very German centric. From that perspective, I would agree with you that supporting a single currency in Europe would reinforce Germany’s economy and provide backbone, economic stability throughout the region. That is, of course, if you subscribe to the thesis that the ‘end justifies the means’.

      The election results from both France and Greece and soon Italy are unveiling another side to this story. German austerity measures are not evenly spread throughout the region and some countries feel that they are being forced to share a larger burden (based on their need to improve) than the rest of the members. How can one argue with them when in Spain unemployment among young adults has surpassed 45%, while in Germany unemployment is at historic lows near 5%. A free-market solution similar to the USA would expect young Spaniards to move to Germany, hence equalizing the unemployment burden. However, regulatory issues that would allow for free movement between borders along with language and cultural differences are inhibiting free market forces to function properly.

      The principal thesis in my article, ‘Modernizing the Euro’, offers a solution with a much more tame social-impact where weak economies would be allowed to improve over time with internal growth, while stronger ones would be rewarded for their efficiencies with lower interest rates. Following this thread,countries using a devalued euro would have higher borrowing costs. As these second tier countries (i.e. Greece, Spain, Italy) become more efficient, their currency would be upgraded accordingly as would their borrowing costs. Granted that a BMW in Greece might cost 15% more using a second tiered devalued euro, but the strengthened economy (as a result of the devalued euro) within Greece would support the 15% price increase. People would still buy BMW’s because they can. If on the other hand the euro is left at par in Greece (as it currently is), the weakened economy in Greece would have trouble earning the funds needed to purchase a BMW in the first place, hence no sale would take place!

      Your thoughts?

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