Eurozone Crisis: A Danger to the World

By Vincent J. Truglia

Europe’s misguided monetary experiment is a danger not just to Europeans stuck in the monetary bloc, but also to worldwide welfare.  The sovereign debt crisis has now dragged on for years, and is taking its human toll in increasingly unacceptable ways.  It is time for Europe’s out-of-touch elites to realize it must be ended, or at a minimum, transformed into a much smaller monetary union.

Orwellian Project

I have been ranting about this terrible project in Orwellian monetary manipulation for years. I choose the word “Orwellian” with care because, as in 1984, euro-babble often means something totally different from the actual meaning of the words used.  As my long-term readers know, I have argued that any monetary union will have winners and losers.  The winners must compensate the losers, or the union is doomed.  Compensation does not mean loans; it means outright transfers. Since Germans, Finns, Belgians, et al, are unwilling to send massive subsidies, not loans, to Southern Europe, the experiment has failed and will only get worse as time passes.

If you doubt my hypothesis about winners and losers, here are some numbers which show how geographically divided the European Monetary Union (EMU) is.

I compared GDP in current euros in 2008, the first full year of the world monetary-economic crisis, and GDP in current euros in 2012, the last full year of data for Eurozone members.  The data comes from Eurostat, the official data gatherer for the European Union.  I used current GDP because I have concerns about the ability of anyone to calculate accurate GDP deflators, or the rate of inflation, in such a turbulent period, especially for countries in crisis.  Also, since this is basically a sovereign and banking crisis, since debts are denominated in current euros, not in inflation-adjusted euros, GDP in current euros seemed appropriate.

GDP: Current Euros 2008-2012 (% Change)

Southern Europe + Ireland

Greece        -17.0

Spain            -3.3

Portugal        -3.9

Ireland           -9.1

Italy               -0.5

Slovenia        -4.6


Northern Europe + Slovakia & Malta

Germany        6.9

France            5.1

Luxembourg 18.7

Netherlands   0.8

Austria            8.5

Belgium          8.6

Finland           3.7

Estonia           4.7

Slovakia       10.9

Malta            14.1


Cyprus is not on the list because although current GDP grew slightly between 2008-2012, GDP is now plunging.  According to Eurostat, Cypriot GDP will be 4.1% lower in 2013 than it was in 2008.  It will likely keep falling for years to come.

Slovakia and Malta Will Eventually Succumb

When comparing Slovakia and Malta to countries already in crisis, their fiscal ratios don’t look much different.  As a result, I predict that these countries will eventually be faced with fiscal crises similar to the rest of the periphery.  It’s only a matter of time.

Core Strength

What is most revealing to me is that although I had expected bad numbers for the periphery, I was surprised by the actual strength of the Eurozone core.  Even as an “offshore” banking center, Luxembourg has certainly not suffered.  A weak number for the Netherlands was a bit of a surprise.  The real standout is Belgium.

Belgium Stands Out

Belgium has government debt ratios worse than many of the countries in crisis.  Its fiscal position has not been radically different than the periphery.  Yet, despite this, it has recorded solid growth.  This shows that more than fiscal policy is at play.  Fundamental differences in economic structure and overall competitiveness between Northern Europe and Southern Europe are important, and can be the only reason to explain Belgium’s results.

As time passes, even if the economies of the periphery stabilize, since the core countries continue to grow, income differentials between the core and the periphery will just grow worse.

Mezzogiorno Writ Large

As time passes, Southern Europeans will grow even wearier of an ever-widening income gap between the North and the South.  It will produce serious political problems. Southern Europe is becoming the modern equivalent of Italy’s Mezzogiorno (Italy’s South), a region, which even after 150+ years, has never caught up with Italy’s prosperous north.  The irony here is that before monetary union, most periphery countries were doing quite nicely.  Monetary union has turned them into beggars states.  Political union under such circumstances – as they say in Brooklynese – Fuhgeddaboudit!

Humanitarian Nightmare

The growing impoverishment of Greeks, Spaniards, Cypriots, etc. is a humanitarian nightmare.  Greeks today are living like Third World citizens, with many lacking the most basic human services, including healthcare, and even adequate food.  Europe is slowly becoming an economic backwater.

The sovereign debt crisis will not go away.  This is where the crisis represents a danger to the rest of the world.  For the last 100 years, Europe has been the cause of two world wars.  As the economic crisis continues, even if in muted form, civil unrest will increase. The best most of southern Europe can hope for is stabilization at existing dismal economic levels.  There is no hope for most Southern European youth.  The longer mass youth unemployment remains, the more the region’s human capital will decline.

Who Wants To Keep The Euro?

Why do many Europeans living in the periphery want to maintain the euro? I believe the reason is simple.  If you are well off and have existing savings, you would prefer to keep the hard euro.  If you live paycheck-to-paycheck, and your job prospects are dismal or nonexistent, then you probably would prefer a return to a national currency, which would allow for a return to normalcy.  The problem is that the “well off” are usually the leaders within society.  Their views normally prevail, at least until the majority ousts the country’s existing elite.  This has happened countless times in Europe’s past.  It is deeply embedded in Europe’s psyche.

The risk this poses to the world is twofold: 1) Europe’s economy has been an important engine of world growth.  On-going weakness will reduce that stimulus meaning lower worldwide growth. 2) If there is a political crisis in Southern Europe, its consequences are difficult to predict. After all, following the disruptions caused by World War I, this is a continent that gave us both Communism and Fascism, neither of which was a gift to humanity.

As always, Clear and Candid.