Here's Why Nobody Will Break Out of the Euro
As anniversaries go, the "year one" for the bailout of the first of Europe's budget sinner - Greece - cannot have been one of the more happily celebrated ones.
No "Ode to Joy" when the euro lost its virginity. Too dramatic a phrase, you say? Well ...Maybe. And maybe it isn't even true. Maybe the maiden euro lost its virginity a long time ago.
When the two countries who wrote the Stability and Growth Pact - France and Germany - were the first to break it.
Or even earlier, when the rules to join the euro were bent (or shall we euphemistically say generously interpreted?) for countries with much weaker economies, much weaker currencies and a deplorable "track record" for fiscal laxity - such as Greece, Portugal, Spain and maybe even Italy.
On purely economic grounds it would have made much more sense to give birth to a much smaller, much more modest euro "baby", a currency union for the old Deutschmark bloc - Germany, France, the Benelux countries and Austria.
For them, the "one size fits all" would have actually FIT ...Well, most of the time.
But there we are back to the crux of the matter and the first and perpetual misconception of the markets, of economists and investment strategists galore: the euro was never an economic animal (we had the ECU - the European currency unit - that was used to facilitate trade flows within Europe). The euro was from its first breath a political creature.
First conceived by two bona fide Europeans - Valerie Giscard d'Estaing and Helmut Schmidt - it was meant to be a major stepping stone to a united Europe. To the United States of Europe - no less.
But when the European unification train began to slow in the eighties and when the end of the Cold War reshuffled the cards of global politics, the only thing that still seemed remotely feasible was a European MONETARY union.
And even that left a sizable chunk of Europe behind.
Most notably Great Britain - which had even scarpered from the ERM (European Exchange Rate Mechanism) by the time.
And there was another piece in the "let's have ourselves a European currency" puzzle: German unification. The Germans were more loathe to give up their beloved Deutschmark, their "Wirtschaftswunder" (economic miracle) currency, than even the Brits are loathe give up their pound sterling.
But then Chancellor Helmut Kohl was prepared to "sell" the Deutschmark and "buy" himself the consent of France to German unification, to assure its neighbors that a united German would continue to think European and not abandon the European unification dream.
So whichever way you look at the euro, its current problems and future prospects, stop thinking as economists, currency strategists or traders.
Or if you do, because that's who you are, then start from this basic truth: the euro was and is a political concept, meant as a catalyst to drive forward European integration and possibly European unification.
The flaws in its construction were well known, maybe even accepted as a future chance to FORCE acceleration in fiscal harmonization.
Either way, the euro has created political, financial and economic realities that cannot be reversed.
Correction - Realities that cannot be reversed with anything less than a political, financial and economic earthquake and following tsunami.
And in realizing that, at least politicians seem to be a little wiser than those doomsday prophets and habitual anti-euro-ites who keep so eagerly chanting the "let's break up the euro" mantra.
I must admit that at times I get a little exasperated by that.
Why? Let's just say this: I have lived through and worked through more Exchange Rate Mechanism (remember that?) adjustments, emergency meetings and more readjustments to believe that the old ER and the old Deutschmark would have survived the past turbulent crisis years even remotely as little bruised as the new euro.
No Way Out Yes, but at least countries like Greece could devalue their currencies. True.
And I grant you countries like Greece would have probably been better of had they not joined the euro. Probably.
But now that they are in, getting out is no solution.
I mean, can you even imagine anybody buying Greek drachma bonds, when then Greeks can't even sell Greek eurobonds right now? Or at least at what financing rate? Thirty percent? Forty? Sure substantially higher than the 20 percent tops for Greek Eurobonds right now.
And what about inflation? When tomorrow the Greeks have to pay everything from coffee makers to cars in hard euros, but earn only very soft drachmas.
You seem to have forgotten that the Greeks, Portuguese, Irish, Spaniards and everybody else have also had the privilege of German inflation (or rather lack thereof) for the past twelve years.
They all better brace themselves to face double-digit inflation and fast eroding net incomes for a long, long time, if they contemplate leaving the euro.
No, I can only quote one of the creators of the euro (and quite a euro-skeptic himself in the beginning), the ex Bundesbank and later ECB chief economist Otmar Issing: "Those who joined the euro knew it was a one-way street. Leaving would be economic and political suicide."
Yep. You better believe it. Having said that, staying in is likely to be extremely arduous, painful and costly.
Thanks to often stumbling, fumbling and voter-wooing politicians no doubt more arduous, painful and costly than it might have been.
But ultimately less so than a breakup of the euro. You better believe THAT too.