Is The Euro The "Barbarous Relic" Of The 21st Century? Musings On The Fate Of Europe By Dylan Grice
With the US increasingly locked up in its own liquidity bubble, even as its traditional trading partner China moves to a trade deficit stance for the first time in years, the key question of how that other critical trading counterparty, Europe, will survive the tensions in its periphery have been persistently unaddressed. As rumors of a Greek credit restructuring become ever louder, the next question becomes not whether it is "constitutional" to bail out Greece, but whether a EMU member can impair the balance sheets of its investors in a pre-packaged bankruptcy, the bulk of whom just happen to be other Union members. And all of this is occurring even as concerns about the viability of the euro as a currency have become a mainstream topic. Below is the latest essayistic observation on the future of the euro and the eurozone from SocGen's Dylan Grice, who as usual shows more foresight on all matters sovereign than most. His conclusion: the euro could very well soon become the short-lived barbarous relic of the 21st century.
Reflections from behind a volcanic cloud of ash
For all the grandiose political loading of the euro project, it is actually only the most recent attempt at a currency union. Some have succeeded, others have failed, and spending time in Helsinki where I’ve been marooned this past week by Iceland’s terrifying volcanic plume (or at least by the hysterical reaction to it) has proved an unexpected opportunity to think about why that is. The euro’s problem isn’t Greece or Spain or even Germany. The euro’s problem is Europe.
Though spring has broken out back in London, there is still grit on the roads and pavements here in Helsinki. Lumps of packed snow are wedged into bus shelters and street corners and people are still wearing hats, scarves and gloves. It?s very cold and still feels like winter, though the people are friendly and the history rich. There are worse places to be stranded.
It?s a good vantage point to think about the euro and the problems that currently blight it too. Sitting here writing in the extreme northeast of the eurozone reminds me just how diverse Europe is. I feel far from the eurozone and even farther from Greece, the current epicentre of its problems on many levels.
The geographical distance is huge. Helsinki is the eurozone?s most northerly city while Athens is its most southerly. But the ancestral distance is no less stark. Greece is the cradle of Western civilisation and Europe?s oldest nation, while Finland, colonised by the Swedes during the Northern Crusades of the thirteenth century and with no written history of its own until the sixteenth, is one of its youngest. While Athens is dominated by Mt Olympus from where Zeus was once thought to marshal the clouds, Helsinki is dominated by its cathedral, built in tribute to Tsar Nicholas I in 1852 and giving the city an echo of Romanov Russia.
These two nations even appear on opposite linguistic fringes: the Greeks still use the same distinct alphabet as their celebrated ancestors while the Finns?" ?Finno-Ugric?" tongue is one the few EU languages which isn?t a member of the Indo-European family.
Yet these countries share the same currency. In the cold light of day it?s difficult to understand why. What do they have in common - a shared ?"European-ness??" Possibly ... but don?t Brazil and Angola have a shared ?"Portuguese-ness?"? Is anyone suggesting they get into monetary bed together?
Anyway, the more you wander around Helsinki and begin to understand it, the more you realise you don?t understand Europe or what ?'European-ness'? is. You might define it as consisting of three ancestral pillars: Graeco-Roman, Germanic and Christian. You might start with the Graeco-Roman tradition, from which comes the notion of centralised state power, of democracy, and in particular secular democracy, and from which the distinction between church and state is derived, in contrast to say, Islam, where there is no such distinction. Then there were the Germanic tribes outside and to the north of the old Roman empire. These tribes? members enjoyed equality in the eyes of the law long before the Magna Carta, and kings were elected according to merit rather than their blood line. They bequeathed Europe a flatter and more meritocratic structure, which tradition found lasting and significant expression in the success of Protestantism in Northern Europe following the Reformation. And you might conclude the final pillar of ?'European-ness'? to be Christianity, which gives its value system: respect for property rights, monogamy, etc. ... but then you?d probably decide this was all a load of convoluted and unconvincing historical mumbo-jumbo and that you still didn?t know what it means to be a European.
And in any case, this "?European-ness?" hardly rolls off the tongue does it? If you ask an American what it means to be American they?'ll instantly rattle off something about freedom and democracy; if you ask a Chinese what it means to be Chinese, you?ll instantly get something back about being a part of an ancient civilisation, not a country; if you ask a Brit what it means to be British they?ll mumble back something about fair play, bad food, and never winning at football.
Political coherence isn?'t cultural homogeneity: Minnesota isn?t like Dallas, Shanghai isn?t like Chongqing, Aberdeen isn?'t like Bristol. But there is a nebulous, intangible yet very real shared "?we"? with which coherent political units identify; an American "?we"?, a Chinese ?"we"? and a British "?we"? (although the nationalist genie is hard to put back in the bottle and today the British "?we"? is weakening). And, because these political unions broadly cohere, they also produce successful currency unions: America has had a single currency since its civil war; each Chinese dynasty through the ages (including today?s Communist Party) has succeeded in imposing a single currency on its realm; Britain has had a stable and successful currency union since the Act of Union of 1707.
So when hard times hit these nations, the idea that the union will break up in consequence is absurd. In the UK, the banks which caused most of the problems for taxpayers (HBOS and RBS) were both Scottish, yet no one sought to make political capital out of it. Notwithstanding the rising nationalist temperature north of the border, English anger towards Scotland and the Scots for "?causing?" the financial crisis hasn?t just been muted, it?s been non-existent. In America, many States face real solvency issues and fiscal crises that are likely to see some defaults, yet no-one is seriously suggesting this will lead to a break-up of the dollar.
Earlier supra-national currency unions in Europe have broken up: the Austro-Hungarian krone broke up in 1919 because the Habsburg ?"we"? wasn?t strong enough to dominate the distinct Austrian and Hungarian "?we'?s"? following the fallout from WW1; the Soviet ruble broke up in 1990 because the Soviet ?we? wasn?t robust enough to dominate, for example, the Ukrainian, Kazakh, Georgian "?we'?s"? following the collapse of communism -? likewise the Czechoslovakian koruna.
The centrifugal force of the nationalist "?we?" broke those common currencies. That those similar nationalist ?we?s? exist in Europe today doesn?t bode well for the future of the currency, if history is any guide. Neither the French, German, Finnish or Greek "?we'?s"? have strong parallels in the older and more successful currency unions of today. Where is the European ?"we"? and if we don?t even know what it is, why do we think it will be sufficiently robust to weather hard economic times?
This is the euro?s first test -? and the early signs aren'?t good. According to an FT/Harris poll published last month, only around 30% of Germans think that leaving the euro would leave the economy worse off, while nearly 40% think the economy would be better off. The same poll showed Germans to be steadfastly against aid to Greece. Why, they ask quite reasonably, should German taxpayers retiring in their sixties bail out Greek tax avoiders retiring in their fifties? Note that German and Greek "?we'?s"? are already trumping any notional European one.
Meanwhile, the brilliantly named Joachim Starbatty is said to be filing a claim at the constitutional court that the aid package is in breach of the Maastricht treaty. It has been reported that if he does, the rescue could be delayed for weeks or even months, though the confident assumption seems to be that his claim will fail. What if it doesn?t?
There is nothing inevitable in the euro breaking up. Decades from now, the European "?we"? might yet dominate the national versions. Indeed, it took so long for the German "?we"? to be forged that in 1916, a full 45 years after the official unification of 1871, a Frenchman who couldn?t have known the heartbreaking resonance his observation would carry in future years noted: "?Still today, Prussians, Saxons, Badensians, Wurttembergers and Bavarians exist in Germany. Only Jews are exclusively German.?"
But neither is there anything inevitable about it surviving. Most of the arguments against break-up seem to be emotional: that there is "?too much political capital?" invested in the euro project for it to fail now, or that it?s "?in no-one?'s interest?" for it to dissolve. Of all the good reasons to give in support of the euro, surely an argument built on the premise that ?"things that are in no-one?s interest don?t happen?" should be the last.
Anyway, the precedent set by arguably the greatest supra-national single currency experiment in history isn?t encouraging. Like the euro today, it involved the use of a cross-border single-currency without political union. Like the euro today, it is impossible to overstate the political capital invested in the project back then, or it?s centrality to the psyche of investors and policymakers. Like the euro today, membership was exalted from within and coveted from without. And like the euro today, any policy action aimed at ensuring the system?s integrity was sanctified and deemed beyond political reproach.
Yet Keynes famously thought it a "?barbarous relic?" and most economic historians today believe that adherence to it exacerbated and intensified the Great Depression of the 1930s. That single currency experiment was the Gold Exchange Standard of the 1920s, and the world?s de facto single currency was gold. Before the system?s collapse the notion that currencies would not one day be backed by bullion was simply unthinkable. But in the face of the chaotic chain of events triggered by the crash of 1929, it was the harsh austerity and painful unemployment levels required to maintain parity to gold standard that instead became unthinkable. How long then before the ?"internal devaluations?" of today become similarly unthinkable, and the poor old euro becomes the "?barbarous relic?" of the 21st century?