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Euro's Future—When Will Rioting Start?

On the future of the euro, and when the serious rioting might start.

I read dozens of articles and analyst reports each week; the most interesting piece I saw this week was an interview in the German newsmagazine Spiegel with economic historian Hans-Joachim Voth.

Voth has examined the history of 28 European countries over the last 90 years. His conclusion:

1) "Austerity and anarchy are closely linked"

2) "Savings [budget cuts] amounting to just one percentage point of GDP are accompanied by social unrest. And when they reach two or three percentage points, it massively increases."

The cuts being asked in Greece — and likely Italy — far exceed two to three percentage points. The debate on the Italian austeritybudget begins in Parliament next week.

Nor are they likely to be implemented: "There's no reason to believe that the scale of reforms currently needed to move things forward economically is politically feasible."

On the future of the euro: he gives the euro another five years, but says it is Germany that should quit the euro, not Greece:

"It would be much easier for Germany than for Greece because it's always the banks that are the problem in such cases. The second the country that is about to have a soft currency steps out of the euro network, all of its citizens are going to plunder their accounts and ask for their money in cash. Then the banking sector is broke."

The main problem: countries can no longer devalue their currency:

"If Spain had gotten stuck in the kinds of difficulties it has today — unit labor costs are too high, growth is too low, and there is enormous unemployment — the peseta would have simply been devalued by 20 percent. In those days, Spain only had to change a single price — that of its currency — in order to make itself competitive again, and the market would generally help out as well. Cars could keep on being built in Pamplona and Seville. Houses on the Costa Brava were still affordable."

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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