The German finance minister, Olaf Sholz, has insisted that the euro is irreversible. Which is one of those Mandy Rice Davies moments, he would say that, wouldn’t he? In fact, he’s got to say it, or if anyone starts admitting that the confidence trick of the common currency can indeed be escaped then it will rapidly become reversible.
We should all be hoping that it does become so reversible of course, so that we can stop the damage it is doing to the continent:
German finance minister Olaf Scholz said the euro is “irreversible”, echoing comments made by European Central Bank Governor Mario Draghi earlier this month in response to growing anti-euro sentiment in Italy.
In an interview with German newspaper Rheinische Post to be published tomorrow morning, Mr Scholz said the euro “secures our common future in Europe”.
Well, those who think that this common future is worth securing will think that great pain is worth suffering to do so. But whether it’s worth zero GDP per capita growth in Italy for two decades, or the more extreme 50% youth unemployment rates in Greece, is a more arguable matter. And yes, both of those have been caused by the euro.
The Italian economy has gone nowhere because it is less efficient than the German one. More, it becomes progressively less efficient as time passes. Labour productivity has been rising faster in Germany than Italy is another way of saying the same thing. Something, somewhere, has to take that strain. An entire de- then re- construction of the Italian economy might do it but that’s a difficult trick to pull off. An alternative is that the one single price, the foreign exchange rate, devalues to take that strain. The euro doesn’t allow that of course.
Greece is worse, for of course Greece is worse. What it really showing being the lengths to which it is necessary to go, the expense of doing so, in trying to make the euro irreversible. The standard – ie, IMF style – solution to the Greek problem was devaluation and default. Devaluation couldn’t be allowed to happen as it would show that the euro was reversible. That €200 billion and up Greece isn’t going to repay is that very cost of shoring up the irreversibility.
As and when those internal contradictions really begin to bite in Italy – France possibly in fact – the cost is going to be how high? And how irreversible will it prove to be?
There have been monetary unions in the past. The pound sterling has worked OK, not perfectly but it has survived. The US greenback is really only about a century old (existed for longer, yes, but there were a lot of private bank currencies and notes in the 19th century, effectively at least). The Latin Currency Union is long gone. What’s the dividing line between those that lasted and those that didn’t?
Well, pretty obviously, those where the benefits were greater than the costs. That tends to be true of most economic outcomes, of most human institutions in fact. We keep doing what’s worth it and stop doing what ain’t. With currency areas what is worth it is defined by optimal currency area theory. Which insists that the pound sterling, the greenback, they probably are the right side of worth it. And the euro, absent true fiscal integration, definitively isn’t. So, either the Germans pay Greek pensions or the euro dies. Me, I insist it will die and the sooner the better to be honest about it.
Meaning two things about these insistences about the euro’s permanence. They’ve got to say it because even thinking about muttering that it might break up makes it likely to happen sooner. But the later it happens the more expensive it’s going to be given the moolah that will be sprayed around to try to prevent it.
The euro should and will die. Sooner is better.