How The Euro Exploded, Part 2

Various Euro bills.
Money. It's the root of all ****-ups

Why has the Eurozone gone awry? Why have the economies of Ireland, Greece and – it looks likely – Italy shot off the precipice like runaway trains? Well as in any transport disaster, several things had to go wrong at the same time. Yesterday we looked at Problem one, the credit boom. That was hardly surprising. The next piece of the jigsaw though may be a little more unexpected…

Problem two: The success of the euro. Mad I know, but in many ways the euro crisis was caused by it acting exactly as intended. It immediately improved the economic prospects of the poorer countries of Europe. Well, the poorer ones that were rich enough to join. Currency stability made the ‘peripheral’ economies attractive to money from the richer ‘core’. They became more profitable places to find investment opportunities.

But there were downsides. When a small economy with its own currency enjoys boom times, one immediate consequence is of course inflation. This reduction in the effective purchasing power of the currency generally causes it to drop in value – as if there was a divine law saying the more money you earn, the less it’s worth. But though that’s frustrating, it at least exerts some moderating influence on the economy. It wasn’t long before a strong currency was the very last thing the rapidly-growing peripheral economies of Europe needed. But adjusting it for their sake was out of the question, their interests were secondary at best. The primary goal of the euro, nearly its entire raison d’ĂȘtre indeed, was to be strong. With no possibility of the currency falling it was almost inevitable that these economies would badly overheat.

This was a foreseeable structural problem with the euro. Loosely-attached economies at the fringes were bound to get yanked about violently by the slow but inexorable movements of such a leviathan currency. Yet we still haven’t decided how to deal with it. Had the credit bubble not coincided, we might have had greater time to adjust and put compensating mechanisms in place. But with the bubble and the fluctuation-amplifying mechanism, well, what we got was bursting boilers and third-degree scalding.

And you know what’s the crazy part? With all this turmoil on the bond markets, with all this panic and fear that countries won’t be able to pay their debts, need international aid from the IMF, be forced out of the euro, you might be forgiven for thinking that the euro itself was in trouble. Yet it sails on, imperturbable, as strong as ever. Indeed, many would argue, quite overvalued. Which is really not what you want from the currency that you have enormous debts denominated in.

There is no escaping this: The euro was devised mainly for the benefit of the larger economies, and it is those economies that have benefited most. Yet it is we in the smaller and more vulnerable ones who are being made to suffer for its failings. Here, we’re even expected to return the investments that outside institutions made into our over-inflated property market – the very money that caused it to explode. They want it back.

The enormity of that has still not really sunk in.

Good Morning, Euro. Euro?

Project 365 #125: 050510 Take Note
Will you still be here when I wake?

Sometimes I miss the old lead-times of print publishing, where you’d submit copy to be published hours or even days later. You had to predict, think about the future. So I’m writing this last thing at night, but setting it to be published at 11 a.m. (GMT+1) – seven hours from now, and hopefully when I’ll be getting up.

What I’m wondering is whether, by the time you read this, there will still be a Euro.

How does a currency cease to be? We know of one mode of course. Hyperinflation – when its value evaporates until it’s worthless. However the Euro remains strong – ridiculously strong perhaps, when you consider the condition of the economies that use it. We may in fact be witnessing the previously-inconceivable opposite phenomenon: runaway hypoinflation.

Alas, this doesn’t mean that the Euro notes in your pocket are going to become infinitely valuable. It’s not that opposite. But it means money is getting too expensive. We can’t afford to borrow as much as we need. And that leads to economic collapse just as surely as it becoming valueless would. Unfortunately however, some countries can’t afford it much sooner than others can’t. So the Euro is dying by a process of killing the economies that use it, one by one.

How can we get out of this? We could print the extra Euro notes we need, but that’s illegal. We could drop out off the Eurozone system and print our own currency again, but that’s a drastic extreme that will lose us a lot of friends.

I can think of a simpler way.

Stop checking for forgeries. Don’t accept obvious fakes of course, but quietly turn off the UV lamps and other hi-tech testing devices. If it looks real, take it. There are a hell of a lot of good fake notes floating around the continent, and we could bring them all here, vastly increasing the money supply. At a stroke, we’d have all the cash in circulation we needed. And there’s not a darn thing they could do.