05/07/10 Stockholm, Sweden – Just two short years ago, it was harder for Americans to justify spending time in Europe. It was much less affordable as the euro hovered near a record high just below $1.60. How things have changed. Today it’s closer to $1.27… down more than 20% on concerns stemming from Greece’s overwhelming sovereign debt.
So, the upside is that visiting Europe is much less expensive right now. The downside? An unraveling euro could set off a strange and potentially drastic set of consequences for the global economy.
Nobel Laureate Joseph Stiglitz further describes the challenge…
“One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages. This, I believe, is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous. It is a fantasy.
“There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work.
“There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms, including the necessary fiscal framework, that should have been made when the euro was launched.”
Unfortunately, the first solution would hurt economically in a way politicians are unlikely to bear. For the second, it’s still quite difficult to envision Germany quitting the eurozone. Finally, the third solution sounds a bit utopian given the inter-state political battleground Europe has been resembling in recent weeks. All three potential solutions are paved with landmines.
If yesterday’s brief but trillion-dollar value wipeout was any indication of things to come, and it probably was, we had better prepare for the worst now. Again though… at least vacations in Europe should be discounted this summer.
Visit Project Syndicate to read more about whether or not the euro can be saved.
Best,
Rocky Vega,
The Daily Reckoning
Rocky Vega
Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let’s Go Publications, Harvard Student Agencies, and The Harvard Advocate.
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I don’t think the third solution is that far-fetched at all. For that, remember that the stakes are extremely high. The eurozone falling apart is a disaster, it’s really not an option. People seem to forget that in Europe, for things to go forward, there needs to be a crisis first. The EU leaders had to move heaven and earth for the Treaty of Lisbon too, but eventually, it came through. That was a political crisis, this is a financial crisis.
And despite all the problems, I can see some benefits too. Firstly, the euro dropping somewhat in value will be good for the mostly export oriented eurozone economy. Secondly, Europe is the world’s premier tourist destination. Euro devaluation will help the tourism sector immensely. Thirdly, due to a sense of urgency, the politicians will finally implement the necessary political and fiscal reforms.
It’s not all doom and gloom and it might even play out to be beneficial to the eurozone economy in the end.
Beneficial…yeah, kind of like getting hit by lightning would be beneficial so you don’t have to buy hair gel to get your hair to stick straight out.
The crisis has genuine benefits:
-The weaker EU member states are forced to implement austerity programs. In the long run, this is beneficial to the eurozone economy.
-Euro devaluation will help the mostly export oriented Eurozone economy, and it will help the tourism sector. Europe is the world’s premier tourist destination.
-The pace of European political and fiscal integration will speed up. We’ve seen that the mandate of the European Central Bank is already expanded.
Like I’ve said before, for things to go forward in Europe, there needs to be a crisis first. In fact, the European Union is only here today because of endless fighting between European nations.
“The pace of European political and fiscal integration will speed up.”
Oh yippee. One big state socialist family. And the ECB can be just like the Fed. Oh happy day.
Don’t count on it. The premise that nothing speeds up integration like disintegration is flawed.
European integration is inevitable. Not only to prevent another war, but it’s also in the best interest of all Europeans. People have predicted the European Union to fall apart for decades now and things have only moved forward. In fact, since the Greek debt crisis began, we’ve seen additional fiscal integration already. I’d say Eurozone disintegration is impossible even, since the negatives far outweight the benefits. Economics professor Barry Eichengreen predicts that Eurozone breakup would trigger the mother of all financial crises. It would trigger widespread bank run all across Europe and bring the world’s financial system to its knees.
As The Daily Telegraph so eloquently put it:
“But if the early reports are near true, the accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe’s AAA rating to help eurozone states in trouble — apparently €60bn, with a separate facility that may be able to lever up to €500bn — is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.”
Winston Churchill might be right after all, when he envisioned a United States of Europe.
Yeah, you might be right. The statists do like to use crises as an excuse to concentrate power. And then again, you might not be. Time will tell.
Where you’re really off-base is in implying that such a “European state” would be a good thing. Behind the smokescreen justifications of preventing more internecine conflict and “moving forward,” what’s really been occurring as Europe “unifies” is the concentration of more and more power into the hands of an unelected, bureaucratic, imperial, scumbag-banker-controlled elite, many of whom are former communist apparachiks and other statist vermin.
The particular ism they operated under in their former corrupt and depraved lives is less important than their current devotion to the domination of all political and economic life by the insider elite. The new aristocracy.
Give me DEVOLUTION toward small, local, less powerful, more responsive/fearful governments that can’t, don’t, and won’t do much, because all government does is PRETEND to provide stability and protection while it loots its citizenry,infecting the body social and economic like a tapeworm…concerning itself only with self-preservation and aggrandizement.
That’s it for now. I’ll let you know what I really think sometime when I’m not feeling so charitable.
I’d agree with you if the region wasn’t Europe. But in Europe, we’ve tried it with numerous small governments already and it didn’t work. With roughly fifty relatively small states, on a geographic region that’s only half the size of the United States, things are bound to go wrong. And even more so if all these nations have their own currency. Indeed, it went horribly wrong in the past. Both World Wars started in Europe.
And I don’t agree with your comment that the European Union is undemocratic. As often as it’s said in the mass media, simply looking at the facts will allow one to see that it isn’t true. All member states democratically elect their own government and the European Parliament is democratically elected as well. Furthermore, all European Union institutions, including the Commission, are accountable for their actions.