April 2013, III

The Euro, Euro-zone and the EU

The Euro

The single currency in the European Union, EU, started to promote trade, business and it would make life easier for the people. The unification with the Euro in the Euro-zone was a political project to bring the EU even more together. A political, or even an economical union, was still a bridge to far. The single currency was essentially an attempt to unify through the back door.

With the current knowledge we know, it worked out not as planned.

The basic idea of more integration, more cooperation, in Europe is not a bad idea, it could promote trade and contacts between the people of the EU. To be successful you need however at least some kind of fiscal union or at best a political union. Regulations, fiscal policy, need to be synchronized to create a real common economy in the EU.

In the end it remains a political concept, what do the politicians and the people want in and with the EU. The governments in the Euro-zone decided that they wanted a common currency, which in the end means more integration, cooperation.

The economy and the Euro

The financial crisis in the world and especially in the south of Europe led to several thoughts about the common currency. Many in the north and south have great doubts about the Euro. It allegedly brought more worse than good. The answer to that question depends on the individual situation and the political outlook.

The common currency, Euro, is however a fact of life and any discussions about if it should be or shouldn’t have been implemented is a rather superfluous discussion. It is here and will be here for now.

The existence of the Euro is up to the members, especially to the big three or four, Germany, France, Italy and Spain. If one of them decides to get out it is over and out.

To leave and abandon the Euro will not deliver the advantages which are described by the followers of independent currencies and sovereign nations.

The main advantage of having an independent currency, if something like that exists, is that the value of the currency depreciates if the economy is performing bad or is in a recession. The lower value of the currency would stimulate export. This would increase growth, more employment, more demand and after that a stronger economy. Regrettably, other countries, your trading partners, are mostly also experiencing economic worser times, limiting demand from those countries and their currency will also depreciate. This will destroy your relative advantage.

Not included in this simple equation is that your imports will become equally more expensive and the payment of loans and interests will also become more expensive. To this, we should ad that the patterns of export and import are in the EU mostly limited to the closest by neighbors and the products are not that exclusive that they’re unique, irreplaceable.

The only EU economy producing products that are more or less unique is Germany, the demand for their products will remain, at lower level but will not evaporate. The products of other economies in the Euro-zone are not that exclusive and can be replaced or even avoided.

The debts of the countries, national or business, are also nominated in Euros, so any change tot hat will be complicated and very expensive to all parties. With a renomination of the currency in a national currency will be more or less 1 to 1, but within a second this will change, the southern currencies will fall and will be need to pay the double to the Euro days. The same is valid for the interest rates which have to be paid. In percentage to the BBP/GNP, whatever, more need to be paid to interest rates.

The advantage of a weaker currency is not valid as it seems, if you are alone on the world and eveybody else is doing all right, it could work. In reality, it works out a little different. All national economies are already that connected, interdependent, that there is no such thing as sovereign national, economic/fiscal, policy.

The future of the Euro

The existence of the Euro depends on its members, especially Germany, France, Italy and Spain. It is still and remains a political project. If they want to end it, it can be done, the price for it will be more expensive for the southern countries as their debts will mulitply and a default will be their only option. This would result in massive write offs for the northern countries. For all countries in the EU, even the ones which are not members of the single currency, the price will be very high. In the end it will be expensive for all parties, countries, involved. Everybody which has some how has a connection through trade or debts with the Euro-zone will be hurt by the end of the Euro.

The countries which kept their own currency will not be off the hook, the ones which are performing better have done their howework before, implemented changes in their economy and are now able to harvest the profits from that changes. But other countries which have not done so are experiencing the same difficulties, it doesn’t matter if they are in or out the Euro. Germany in the Euro and Sweden, Switzerland and Norway outside the Euro are doing better. Norway is of course a different category with its massive oil/gas resources. The UK and to a lesser extent Denmark, even if they’ve their own currency, are doing not that good. Just as many of the other Euro countries with high debts and unbalanced budget deficits.

There will be no winners nor advantages in leaving or ending the Euro. Continuation of the Euro will demand further unification, fiscal and political unification, to structurally solve the problems in the Euro-zone. This will demand changes and adaptions in and from the Euro members. All choices will be expensive but a world with a Euro will be more beneficial, cheaper, especially on the long term.