EconoMatters, Rethinking Europe

Europe Needs to Take a Chill Pill

A controlled unwinding of the euro might offer material economic benefits to many members of the Eurozone.

Credit: Hadrian - Shutterstock.com

Takeaways


  • For all the intense efforts being made, the European economies inside the Eurozone are not converging, but drifting further apart.
  • A controlled unwinding of the euro might offer material economic benefits to many members of the Eurozone.
  • Countries with economic fundamentals that are incompatible with a common currency can design solutions for themselves that lessen the pain,
  • The euro will eventually explode uncontrollably like the lava in Hawaii with fissures everywhere.
  • An unwinding of the euro would not represent the end of the European Union – nor peace in Europe.

In Italy, the populist left-of-center 5-Star Movement and the populist right-wing Lega may have failed, for now, to form a government. Their highly controversial, non-conformist policy platform had put European pundits on red alert. The EU political class issued stern warnings about the impending doom.

But what’s at the root of it all? Is it a strange form of Italian left-right populism? Or is it the overall architecture of the euro project?

Some 25 years ago, early critics of the European Project that centered around a common currency were ridiculed, belittled or accused of ill will. Yet, all these critics had done was to ask hard questions about the economic soundness of such a currency.

Unfazed, European leaders, whether blinded by their own sense of self-aggrandizement or a lack of economic realism, decided to push ahead.

The Greek crisis

When the Greek crisis began to take shape in 2009, things got quite rocky. Seven years later, after what felt like non-stop 24/7 crisis management, the Euro seemed safe. Disaster was averted — and those pesky critics who had questioned the economic soundness of the euro project were once again proven wrong. The EU political class breathed an exhausted sigh of relief.

Only two years afterwards, non-Italian Europe is hyper-anxious again. After all, the new Italian government – now aborted – appeared to pursue a plan to establish a parallel currency. That would potentially allow an eventual exit of the country from the Euro.

While that government may be off for now, it’s unclear whether it won’t be on again soon (sort of like the Trump-Kim summit in Singapore). Moreover, it is quite possible that new elections will only strengthen the voting percentages of the populist parties in Italy.

High time for realism

As unpleasant as it may be, it is high time right now for the European political class to ask itself whether the near-constant threat (real or perceived) to the sustainability of the euro might not be caused by its structural design flaws.

The hard fact is that, for all the intense efforts being made, the European economies inside the Eurozone are not converging, but drifting further apart. Unemployment in many countries is structurally and chronically high. The sustainability of social safety nets in many countries is strained under a common currency, so is their competitiveness. The list is long.

Instead of undertaking a sober assessment, European policymakers tend to talk down to people. They lecture them that an unwinding of the euro would represent the end of the European Union – if not of peace in Europe.

This is nonsense, unless European leaders want that to be the outcome.

A controlled unwinding of the common currency, on the other hand, might offer material economic benefits to many members of the Eurozone. More importantly, it might considerably reduce the populist political threat that is looming over all of Europe and that is indeed a threat to peace in Europe.

How to battle the populists

This threat to European political stability is real. If the establishment removed one of the key boogeymen that feeds this populism – the common currency – these radical parties would lose one important raison d’être.
Greeks can no longer blame Germans for their misfortune — and Germans can no longer curse Greeks for taking all their money.

Ditto for Italy. Just recall that Matteo Salvini, the new strongman of Italian politics, recently opined: “German journalists and politicians insult us: they call Italians beggars, lazy, tax evaders, freeloaders and ungrateful people. And we should choose a finance minister that they like? No, thanks! #ItaliansFirst.”

Unwinding the euro

Unwinding the Euro in and by itself does not solve nation-states’ economic problems. Rather, it puts the onus of doing so squarely with each country’s political establishment.

But countries with economic fundamentals that are incompatible with a common currency can design solutions for themselves that lessen the pain, once on their own.

If Europe, however, refuses to face up to these critical realities and chooses instead to raise the decibel level of hysteria, mounting more threats on others, it is guaranteed that radicalization will grow not only in the countries being yelled at, but also in the countries that do the yelling. Not to speak of the fact that the euro will eventually explode uncontrollably like the lava in Hawaii with fissures everywhere.

In other words, this would be a good time for all of Europe to take a collective chill pill. Or as the English preacher C. H. Spurgeon would have said: “Anxiety does not empty tomorrow of its sorrow… but only empties today of its strength.”

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About Uwe Bott

Uwe Bott is the Chief Economist of The Globalist Research Center. He is based in New York. [United States] Follow him @UweEconomist

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