There’s quite a bit of kerfuffle in the econblogosphere today about Wolfgang Münchau’s FT piece in which he begins the countdown to the collapse of the euro—at this point by his reckoning just ten days away:
The eurozone really has only days to avoid collapse: In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action. Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.
The short version of his prescription is that the EMU must:
- Get the IMF to underwrite its needs to tune of several hundred billion euro.
- Implement eurobonds.
- Implement a fiscal union.
A pretty tall order pragmatically, not to mention politically. As an American I object to this because it puts the U. S. on the hook for dealing with a purely European problem that the Europeans are quite capable of dealing with themselves. They just don’t wanna. The particular ignominy is that the euro is, at its core, a U. S. attack vehicle. Otherwise, they could just have adopted the dollar as the common currency. Consequently, we’d be paying to prop up a currency that exists to stick a thumb in our collective eye in order to avoid risking trade with an economic zone with which we have a $70 billion trade deficit. There is something wrong with this picture.
As I’ve been saying for some time, under any European fiscal union that actually worked, every year Germany would send some proportion of its GDP to Greece, Ireland, Portugal, etc. just as California, New York, and Illinois sends a portion of their GDPs to Wyoming and Mississippi (just to name two). That is anathema to the Germans.
What we’re seeing in Europe is the working out of the implications of the Articles of Confederation here in the States. For the ethnic states of Europe abandoning nationalism will be significantly harder than it was for us: they are different countries with markedly different traditions, senses of justice, and shared experience. For us that required a civil war and two-thirds of a million dead. What will it take in Europe?
Most of all Germany would need to abandon its mythic view of thrifty, hard-working Germans vs. spendthrift, lazy southerners. I see no prospect whatever of that happening within the timeframe required.
“The particular ignominy is that the euro is, at its core, a U. S. attack vehicle. Otherwise, they could just have adopted the dollar as the common currency. Consequently, we’d be paying to prop up a currency that exists to stick a thumb in our collective eye in order to avoid risking trade with an economic zone with which we have a $70 billion trade deficit. There is something wrong with this picture.”
All true. Whether the EMU adopted the euro, the dollar or the yen the dynamic is exactly the same: the members become users of a foreign currency and are no longer monetarily sovereign.
We can let the EMU fail and:
A) our exports to Europe collapse because of reduced demand.
B) if the core nations split off, the euro appreciates massively and swings our trade balance into positive territory.
C) capital flees for the U.S. dollar and causes OUR currency to appreciate, making our exports less competitive.
I’m thinking we get all three.
The way I’ve got it figured our imports from the EU outweigh our exports to the EU about 3:2. Our exports to the EU account for between 1.5% and 2% of GDP.
How much exports would fall depends on what “collapse” means. If all of our exports dried up while imports increased, I suspect that protectionist forces would become irresistible and we’d start capping or otherwise limiting European imports. I doubt our exports to the EU would decline by more than half and in all likelihood the decline would be less.
Capital flight to the U. S. will cause U. S. assets to increase in price, not just dollars.
I have no idea whatever what impact the return of the drachma, lira, peso, etc. would have on our exports to Greece, Italy, Spain, etc. respectively.
Last random observation: we can neither let the euro fail nor prop it up. That’s just beyond our ability.
If southern Europe returns to their native currencies, I think it’s a safe bet they take steps to keep them weak so as to rebuild their economies.
The Federal Reserve could actually provide the liquidity European debtor nations need if we wanted to. It could simply buy bonds at pre-negotiated yields and prices on terms highly favorable to the debtors, but the economics are as far as we can go, you’re correct. We have no power to address the political problems standing in the way of fiscal union or the rapidly deteriorating relations between the periphery and the core.