Jack Worthington's Social & Investment Commentaries

Eurozone’s Fundamental Problems and EU Politics

Posted in Investment & Social Commentaries by Jack Worthington on June 10, 2014

Eurozone’s Fundamental Problems and EU Politics

 

More on this issue because in my view, fundamental problems in the Eurozone are a key reason for the nationalist Euroskeptic victories in the recent EU elections and pose an existential threat to the Eurozone project…and rightfully so.

 

This is written in the hope that the average non-financial person in Ukraine and other potential EU entrants can better understand the Eurozone and make informed decisions.

 

Currency Union:

By combining the relative strength of the Deutsche Mark with the relative weakness of Southern European currencies, the resulting Euro is weaker than the previous Deutsche Mark, and stronger than the previous Lira, Franc, Peseta, et al.

 

The Result:

  1. The fundamental strength of the Deutsche Mark is watered down, and German exports are more price competitive on world markets, and Southern European exports are less so.
  2. Albeit not a Debt Union…implied but not assured:  The stronger national balance sheet of Germany is weakened to a lesser degree, and the weaker national balance sheets of S Europe are strengthened more significantly.  I.e. the main effect is that relatively weaker borrowers in S Europe have been able to borrow money at artificially lower interest rates and in larger volumes.

 

The Obvious Inherent Problems:

  1. Artificially low unemployment in Germany and high unemployment in S Europe.  I.e. as currently structured, the Eurozone is a powder keg of social instability waiting for a match.
  2. Fundamentally weak borrowers in S Europe were encouraged to borrow too much…asset bubbles were created…and bang…here we are…the Eurozone crisis.
  3. Due to the widely divergent economic growth vs. stability needs of Eurozone members, the Eurozone isn’t an “optimal currency area”, and is fundamentally incapable of supporting a single currency to meet its various members needs efficiently; i.e. Germany and Greece are profoundly different countries.  The same problem exists between states within the US, but to a lesser extent.
  4. The Eurozone is an economic bonanza for Germany, and a catastrophe for lesser-developed members, who take the candy of cheap money, only to get a mouthful of cavities later.

 

More “Ukraine’s” in Germany’s captive Eurozone market?  Bitte!  As long as I don’t have to co-sign on your debt!  I.e. as currently structured, it’s a one way street baby…or a roach motel: you can check-in but can’t check out.

 

The recent EU election results show that a growing number of Europeans are demanding a Eurozone check out.

 

Proposed Solution:

Currency zones have potential to work well for the benefit of all when the member states are more closely aligned in their culture, economic development cycles, and national debt is underwritten by the zone; i.e. 1+1 can equal 3.  Otherwise, it’s like an out-of-balance wheel that will eventually destroy the machine.

 

  1. Split the existing Eurozone into at least 2-3 new currencies.  Northern Euro anchored by Germany.  Southern Euro anchored by France.  Germany has the most to lose, and France has the most to gain.
  2. An entry-level / preparatory Euro for a group of new entrants at same level of econ development? 20-50 year integration project?

 

Currency union in Europe can work, but needs to be restructured to defuse the dangerous, built-in social instability.  Of course, Germany will vehemently oppose this proposal and defend the Eurozone to the bitter end; i.e. when members demand a check out…they enjoy this free ride like Americans enjoy the free ride of world reserve currency.

 

JW

NY, NY

10 June 2014

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