We Need a New Euro, but for Losers
The only thing that can save Europe’s common currency is another common currency — for the B-Team.
The crisis in Greece, leaving its economy in shambles and its creditors with little realistic hope of significant recovery of the hundreds of billions of euros they are owed, was calmed temporarily yet again, just in time for the European vacation season. The institutional overseers of the eurozone are attempting this month to apply another layer to the gangrenous tourniquet of bandages intended to prevent the toxic Greek economic bloodletting from infecting the other weak patients of Europe. Yet both the “healed” and “healers” know that the sopping and rotting plasters won’t hold. As a result, the draft agreement between Greece and its creditors, advanced by technocrats on both sides this week, is facing substantial political headwinds and may end up stillborn.
The euro scheme is unraveling in slow motion. If nothing is done to reverse the present course, it will eventually result in not only the contamination of the nations on the eurozone’s periphery, but also schisms among and within the common currency nations that will destabilize even the stronger ones. (Witness the caustic debate within Germany following last month’s “Sack of Athens,” when the Greek government of Alexis Tsipras was forced to turn-tail and agree to the austerity measures it had been fighting vehemently against since its election earlier this year.) Make no mistake, a destabilized European economy will wreak havoc on the all-too-fragile recovery of the global economy and place the U.S. dollar on an ever-strengthening trajectory (exacerbated this week by China’s devaluation of its own currency) that is already threatening domestic growth in America.
The heart of the euro system, the single currency, has been living with a birth defect for 16 years. The plaster cast of a fixed currency — rigid, yet very much breakable — attempting to bind together a continent without a common fiscal framework or system of internal transfers, is akin to skeleton and muscle attempting existence without a circulatory system or a neural network. The resulting imbalances have seen the vast majority of the benefits of the eurozone essentially “going to its head” — that is to say, Germany. The euro is a weak currency (relative to the value, say, that would be attributed to a Deutsche mark) that allows Germany to cheaply export to the rest of the world, resulting in monumental German trade and current account surpluses. The weak European periphery is hamstrung by the common currency and can only hope to compete with Germany through painful “internal devaluation”: the evisceration of its price and wage structure and standard of living. Thus, the body that is the eurozone cannot be sustained, regardless of what the head thinks, without significant repair.
As the situation in Greece has demonstrated quite vividly over recent weeks, it seems as though no one in Europe — not even the desperate Greeks themselves — are working on preparing a lasting cure. The “Grexit,” now being endorsed by elements in Germany and elsewhere (who, rather shockingly, seem to believe they will still end up recovering some portion of the Greek debt if Athens exits the eurozone) is a chimera. There is no orderly way to suddenly introduce a drachma or any alternative currency without months of planning — during which the Greek economy would plunge from severe disability to a deep freeze.
Most economists agree that if the eurozone nations could suddenly bring themselves to surrender more than just sovereignty over their currency and accept full federal integration and an effective internal system of monetary rebalancing, similar to that of the United States, Europe would be saved and would prosper. That may and should happen someday, but — as with plans for a country exiting the eurozone — no one is seriously working on such an integration beyond reciting lofty goals for the future.
While no single country can reasonably be expected to exit the common currency in an orderly manner, I believe one or more can, as described below, with the assistance of the European Central Bank (ECB) and some politically feasible cooperation among the eurozone nations. The answer is not de-accession from the zone by any country, but rather the adoption of a “junior euro” currency by those nations unable to thrive under the present one. This “euro B” idea is not entirely new, but its time has clearly come. And, with some refinements, it can realistically be implemented to cure the tragedy in Greece and fix the deeply destabilizing imbalances across Europe. Doing so would offer a “time-out” for all of the eurozone, rather than a “boot-out” for Greece alone, during which the nations of Europe can get their act together and decide whether they truly have the desire and stamina to advance the European project in a sustainable manner.
As I see such a solution working, the ECB would issue a second currency that would be pegged to the euro and adopted as legal tender by existing eurozone nations that cannot make a go of things under the present regime and elect to opt-in. Such a peg would be set and defended by the ECB at “whatever it takes” (to use what has become ECB President Mario Draghi’s most famous phrase) to allow those economies to become competitive again. This peg — starting, perhaps, at around 60-70 percent of the value of the present euro — would be gradually adjusted upward over time as imbalances are rectified by a relocation of production and jobs to the presently distressed nations. The debt of the distressed nations would be redenominated in euro B, which would provide interim debt relief. Meanwhile, creditors would be strongly rooting for growth in the periphery (contrasting sharply with growth-killing demands for austerity) and the upgrading of the peg over time.
Yes, Germany will in the interim at least suffer a form of a “haircut” of Greek debt (i.e., its redenomination in euro B), and because the present euro will undoubtedly rise in value with this solution, lose some of the benefits in manufacturing and trade that it should not have benefited from in the first place had the eurozone been more than a premature monetary union. Instead of financing consumption in the periphery, as it was leading up to the crisis, Germany will enjoy an attractive opportunity to finance investment in the periphery that its own firms can reap rewards from. Most importantly, however, Berlin will also benefit — as will all other nations — from dramatically increased consumption by its presently moribund cousins, which will have, together with Germany, the opportunity to, over time, graduate into the mutually responsible union that appeals so much to the German sense of right and wrong.
And one day, in an eminently foreseeable future when the euro B reaches near-parity with the euro, and is no longer needed, a presently incapacitated Europe can rise off the surgical gurney and finally embrace a monetary and fiscal transfer union without the threat of future imbalances.
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