The Wreck of the Euro
Published on: April 15, 2013
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  • Lorenz Gude

    My respect for the ‘perverse’ science runneth over. So the profligate Euros are worth more than the abstemious! I have witnessed hyper inflation in Zimbabwe after the year 2000, and live in Perth Western Australia where we have a major, but un-popped, property bubble. I watched the streets of Bulawayo go deathly quiet except for the grocery stores as the shrinking Zimbabwe dollar drove people to buy food before the price went up and and income from mining was immediately converted into heavy trucks that could hopefully driven out of the country camouflaged by spurious cargo. Here in Perth I recently walked through an old middle middle class neighborhood where every house for sale at a local realtor was priced at 1.5 million although the potential rental return would not even dent a monthly mortgage payment. Commercial rents empty shopfronts because any rational return on capital for the owners makes rents impossible for most ordinary businesses to pay. The most perverse twist I’ve heard is that a Newsagent is managing to hang on because his lottery ticket sales are way up as people caught in the crosscurrents plunge to sustain their position. And this kind of thing is just beginning.

  • Kavanna

    This is a new way to look at an old problem, the scale of internal devaluation needed to bring the Club Med country assets back to earth and in line with their actual competitive position.

    It could go either way, or be a combination of both: a neuro rise and a seuro fall. A split like this would benefit everyone — except for all that debt denominated in euros.

    Once the southern debt is partly or completely written down, and it will be, there will be a huge banking crisis in the north. This seems now unavoidable.

    Certainly, the euro as we know it now is doomed.

  • Blub

    There is a problem here, though. Salaries in Germany are also much higher than, say, in Spain. Two to three times as high. So is the cost of life, if possibly not by the same factor.

    Yes, the Spaniards (and the Americans and many others) have a very unrealistic view of real estate and so demand has upped the prices. At the moment, at least in Spain, the gouvernment is doing what it can to artificially prop them up, boosting “wealth” (which I don’t know how you can be wealthy if your house belongs to the bank, but…).

    It is still notan explanation. Say, the Germans are not buying houses as much as others do – wouldn’t they have savings? Wouldn’tthey have investments? Why don’t they? Where is all that money going?

    The truth is that most Germans only get by every month. Taxes are at over 50% of the GDP, sapping the strength out of the little ones as of the big ones.

    And if you haven’t heard of Target II: We are even paying our own exports – another source of wealth gone.

    • Salaries for who? I don’t consider a salary of 1800 euro a month for full time work high and that is pretty close to average in most of Germany.

      • Blub

        Compared to €900 in Spain? Average in DE is about €2100. I’d say that’s a substantial difference.

  • Jim Luebke

    This is wild…. is it possible to work a job in the South, commuting (or telecommuting) from a less expensive residence in the North?

  • KB

    I believe the survey was done beforethe real estate bubble popped so it overstates the net worth of people on Spain and other countries. I believe it also fails to consider pensions.

  • moderate Guy

    You know the old stereotypical joke about three Jews who were shipwrecked on a deserted island. Ten years later they were rescued, all three immensely wealthy. They made their fortunes trading hats with each other.
    The Euro was designed to work exactly like that.

  • If neither Greece and Germany, nor Spain or the Netherlands, will leave the Euro, then perhaps a new, private currency along the lines of bitcoin could work. Greek people could start a virtual drachma. Greeks could use them to pay each other for local goods and services. They would still need Euros to pay the government and foreigners, but at least some would go back to work. Could this form of reflation and internal devaluation conceivably work?

    Perhaps. And there is amusing irony here. Bitcoin may or may not be a good idea, but a lot of its boosters are wingnuts angry with the federal government, or slightly deranged gold enthusiasts. Where private money might work is to implement the policies that their nemesis, mainstream Keynesian economists, have been suggesting all along.

  • Sgt.Friday

    I have travelled to Germany a number of times in recent years, and to me it feels richer than the United States. As noted, housing prices are quite low, in part no doubt, because they don’t have a mortgage interest rate deduction.
    What is not clear is how and why the prices should be so inaccurate. Before the Euro, the currencies were independent. Yes, they were managed, but if someone really doubted the value, I would think you would have had a blackmarket.
    The reason i am a Euro skeptic skeptic is that America has had a unitary dollar, since at least 1913, even as we had Massachusetts and Mississippi in the same country, without that causing huge problems.
    Something is hugely wrong in Europe, but I have to feel that the Euro is getting too much of the blame these days. You don’t have 25 percent unemployment, as you allegedly do in Spain, unless your welfare spending is too high and/or you have way too much regulation of labor.
    Absent one or both, people would work for whatever someone would pay. That would increase supply. There would be more to go around, and the economy would start functioning again.
    I am not denying that the Euro may be a problem. But way too often people confuse money with value. The economy is things people do and have, and that is where the focus belongs. Doing more. Which over time, let’s you have more.

    • Mark Michael

      Sgt.Friday, you’re right in that blaming a common currency for the problems seen in the eurozone is blaming the wrong thing – IMO, altho hopeless to make that case in the current circumstances. People inclined towards government-centric views of countries will do that. The disparity between our states in the early 20th century (Deep South vs. the North – Northeast, Midwest, Far West) was much larger than between those southern European countries and the northern ones of today by far.

      At the time of the Great Depression when we had up to 25% unemployment (1933 peak) nobody said, “We need a southern dollar, a northern dollar or our economic problems are insoluble.” We did go off the gold standard, though, in a weird sort of way. (FDR devalued it from $20.67 a Troy ounce to $35 a Troy ounce. He also forbid private ownership of gold coins if I recall history correctly.)

      It probably is true that America has never had the endemic corruption that pervades much of that southern tier of European countries. (At least Greece, Italy, Cyprus; Spain and Portugal to a lesser extent. The northern countries are pretty clean and efficient government-wise.)

    • Chris Smith

      Sgt.

      The “American” model works because we are very free to move from one state to another. Massive internal migration allows the people to follow the jobs/prosperity. All the while, the laws, language and culture remains pretty consistent between Mississippi and Massachusetts. Not 100% consistent, but not nearly as disparate as Germany and Greece (which do not even share the same alphabet).

      The Eurozone does allow for somewhat free movement of labor, it’s not nearly the same. If it were, you’d see massive amounts of Greeks moving to Germany in search of better paying jobs and/or cheaper cost of living. Like Okies coming into California during the Great Depression.

      • Sgt.Friday

        Good point. I was also in Greece a few years ago, and boy was it hard to know where you are, if you hadn’t learned the Greek alphabet (me), and they didn’t have Roman alphabet signs..
        But thanks to the Olympics, which lots of people don’t like, a lot of people as far as I could tell, beyond just taxi drivers.
        But it’s not just Greece.
        I live in NY. Not so much now, but I remember a few years ago, you saw employees in pizzerias speaking Spanish and Italian together. It can be done. French is not that far apart, and historically, there was tremendous inter-mixture.
        European Jews were pretty successful operating in different languages.
        It’s kinda normal in much of the world.

    • leadingedgeboomer

      The key problem with the Euro is the lack of a real central bank with power. The ECB is not that institution. Our Fed has enabled Massachusetts and Mississippi to co-exist in a financial union that works.

    • The big difference is that Massachusetts and Mississippi have different levels of regulation and different legal codes while all the euro nations are being “harmonized” so the stifling regulations that are comfortable for Germany’s style are stifling the PIIG nations.

    • MOST INTERESTED in this writer’s observation that “housing prices are quite low…because they don’t have a mortgage interest..deduction”. This part of our tax code drives up the price of housing by favoring a house as a place to spend your money. Throw money at anything and you run its price up. Were we to eliminate all deductions not of universal value the money would settle on items in proportion to their intrinsic value. By “universal value” I would suggest education, healh care, and a personal exemption sufficient for basic human needs, perhaps some multiplier of the poverty level or of the minimum wage.

  • Corlyss Drinkard

    “But anybody who’s traveled in Europe understands that these numbers have something wrong with them. Germans are significantly richer than Italians and Greeks.”
    The southerners pay a terrible price for the corruption that’s endemic in their societies. They may think it’s a fair trade that functions as a great equalizer. But the hidden costs are a burden on the entire operations. I dare say the Germans and the Brits have far more accountability and far less corruption taxing their systems.

  • Croak

    Silly question that’s sort of on topic…I’ve just accepted a job working in Malta (after 7 months of being unemployed, ANY job is looking good).

    The pay is excellent, matches my old American salary, which puts it well above the Euro norm for my profession, comes with solid benefits and relocation packages, and due to Maltese incentives, there’s only a 15% flat income tax to worry about.

    My salary offer was in USD, and reading my offer letter, they offer the option to get paid in Euros, “pegged” at the exchange rate on the day I start.

    So, that’s the setup, here’s the question. Should I chose the Euro (since I’ll be in the EU for at least a year) or go with the USD? I should mention that I’m a US citizen, and with US bills to continue to pay.

    • JWJ

      Go with the currency that you will pay the most expenses in during this year.

  • Perhaps these economic ills are but symptoms of a greater issue; the reason for countries to have been formed, and to endure. There are obvious cultural differences among the European nations, To bind them together by the Euro was to ignore the disparity in values. An hour’s work by the average citizen might be a better unit of exchange than any paper. Such a unit obviously has vastly different worth in Crete than in Norway. The adoption of a common currency obscures this difference, most likely for political correctness European style. There is no solution until the integration of European ecomomies is reversed. The much reviled tariffs and trade barriers will need be reinstituted until truly free trade is restored by floating exchange rates amont the currencies of these nations.

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