Column: It’s not Greece, it’s the Euro

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Published: July 10, 2015 12:18:00 AM

A common monetary policy doesn't work without a common fiscal one which requires a single electorate

The coq au vin is coming home to roost. France’s unemployment rate for people under 25 years of age is nearly 25% (overall 10.3%). For Italy, the numbers are 42.4% and 13%; for Spain, 53.2% and 24%; for Portugal, 32.9% and 13.3%. And, oh yes, there’s Greece, where youth unemployment is 50.4%, in an overall unemployment rate of 26.1%—and these numbers are from before the most current crisis.

On the other side, of course, is Germany, where youth unemployment is a modest 7.5%, in an overall unemployment rate of 5%, which is lower than the 5.3% recently recorded by the US, which is being considered “full employment.”

This is a union? Indeed, leaving aside Germany (and Austria and the Netherlands), the Eurozone is in a mess—average unemployment is 11.5%, with youth employment at 23.2%. For comparison, youth unemployment in WANA (West Asia and North Africa), the source of the largest number of terrorist recruits, is at 30%.

What is more terrifying is that it is impossible to see how these horrifying human condition numbers in the Eurozone can be improved. Growth is the primary force that can reduce unemployment, given that complying with the Eurozone stability and growth pact ensures that none of the countries has any fiscal room.

Now, there is no arguing that fiscal responsibility is a good thing—and, it would seem, that the Euro experiment will, if nothing else, ensure that European governments are more Teutonic from this standpoint into the future (just as Asian governments have accumulated FX reserves as the strategic lesson from the 1997 Asian crisis). But, as my dear mother used to—and sometimes still does—say, there’s a time and a place for everything.

With global growth showing signs of worsening from its current pathetic state—witness export growth numbers in country after country (China, India, the US), and the sharp fall in the prices of copper and gold, for instance—there is no way, in the current structure, for European countries to generate sufficient growth to even make a dent in these unbelievably difficult unemployment numbers.

Of course, if each country ran its own currency (or the Euro gave way to two groupings—EuroN, comprising Germany and its true relatives, and EuroS, comprising the countries of Southern Europe)—the resulting change in currency values could certainly generate some additional growth in, say, Italy, whose manufacturing is world-class and could compete much more strongly with German companies if its currency was, say, 25-30% weaker than the Euro.

All this, particularly with the mirch masala thrown in by Tsipras and the Greeks, will no doubt embolden politicians across the continent—note the hero’s welcome given to Tsipras at the European Parliament by both leftist and far-right members (many of whom have been calling for an end to the Euro for some time). Clearly, we have only seen the tip of the political instability iceberg.

I guess the simple truth is that the Euro is a failed experiment. There have been numerous commentators who have argued ad nauseam the point that you can’t have a single monetary policy without a single fiscal policy. And all the ECB’s structural horses and all the ECB’s structural men—whether enabling it to be a genuine lender of the last resort or whatever—will not be able to hide the fact that you can’t have a single fiscal policy without a single electorate.

And, irrespective of academic discussions on political union, you can’t have a single electorate in Europe—period. The only example of a political union in history—perhaps, I should say, recent history, since I am quite a philistine when it comes to real history—was the union of East and West Germany, and this may well have been part of the trigger for this mad dream. But to think that the Italians and the Spanish and the French, on one side, and the Germans and the Dutch and the Austrians, on the other, could come together in a single political formation is hallucinating beyond even the effects of LSD.

A smart young Frenchman summarised it very well to me a couple of months ago. “We can connect quite easily with Spaniards and Italians; in a sense, we speak the same language, we often complete each others’ sentences. With Germans, though, the structure of the language is such that you have to wait for them to complete their sentence to fully understand what they mean. While I have German friends (and have had German lovers), there is no real visceral connect.”

These obvious facts were conveniently overlooked by the Europhiles from the time the Euro was launched in 1999, through when Greece was ceremoniously brought in (2001) through further expansions. Global growth was booming and everyone was doing well.

Until, of course, 2008 made us all aware of yet another obvious fact that was conveniently overlooked by most—that the sterling growth was driven by free money from the Fed. Now, that the tide has gone out (to quote some smart person), it is pathetically obvious that almost all of Europe has been swimming without any clothes on. And while skinny-dipping is actually quite a joy, being caught with your pants down (or with declining pensions and no jobs) is no fun at all.

Thus, while Greece is the obvious immediate problem and its exit from the Euro is the immediate solution, there is a lot more uncertainty to come.

The author is CEO of Mecklai Financial

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