Guest Post: Why The Eurozone And The Euro Are Both Doomed

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Why the Eurozone and the Euro Are Both Doomed  

Papering over the structural imbalances in the Eurozone with endless bailouts will not resolve the fundamental asymmetries.

Beneath the endless announcements of Greece's "rescue" lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.

The key imbalance is between export powerhouse Germany, which generates huge trade surpluses, and its trading partners, which run large trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain.

Those outside of Europe may be surprised to learn that Germany's exports are roughly equal to those of China ($1.2 trillion), even though Germany's population of 82 million is a mere 6% of China's 1.3 billion. Germany and China are the world's top exporters, while the U.S. trails as a distant third.

Germany's emphasis on exports places it in the so-called mercantilist camp, countries that depend heavily on exports for their growth and profits. Other (nonoil-exporting) nations that routinely generate large trade surpluses include China, Japan, Germany, Taiwan and the Netherlands.

While Germany's exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero. Without strong export growth, Germany's economy would have been at a standstill. The Netherlands is also a big exporter (trade surplus of $33 billion) even though its population is relatively tiny, at only 16 million. The "consumer" countries, on the other hand, run large current-account (trade) deficits and large government deficits. Italy, for instance, has a $55 billion trade deficit and a budget deficit of about $110 billion. Total public debt is a whopping 115.2% of GDP.

Spain, with about half the population of Germany, has a $69 billion annual trade deficit and a staggering $151 billion budget deficit. Fully 23% of the government's budget is borrowed.

This chart illustrates the dynamic between mercantilist and consumer nations:

Although the euro was supposed to create efficiencies by removing the costs of multiple currencies, it has had a subtly pernicious disregard for the underlying efficiencies of each eurozone economy.

Though German wages are generous, the German government, industry and labor unions have kept a lid on production costs even as exports leaped. As a result, the cost of labor per unit of output -- the wages required to produce a widget -- rose a mere 5.8% in Germany in the 2000-09 period, while equivalent labor costs in Ireland, Greece, Spain and Italy rose by roughly 30%.

The consequences of these asymmetries in productivity, debt and deficit spending within the eurozone are subtle. In effect, the euro gave mercantilist, efficient Germany a structural competitive advantage by locking the importing nations into a currency that makes German goods cheaper than the importers' domestically produced goods.

Put another way: By holding down production costs and becoming more efficient than its eurozone neighbors, Germany engineered a de facto "devaluation" within the eurozone by lowering the labor-per-unit costs of its goods.

The euro has another deceptively harmful consequence: The currency's overall strength enables debtor nations to rapidly expand their borrowing at low rates of interest. In effect, the euro masks the internal weaknesses of debtor nations running unsustainable deficits and those whose economies had become precariously dependent on the housing bubble (Ireland and Spain) for growth and taxes.

Prior to the euro, whenever overconsumption and overborrowing began hindering an import-dependent "consumer" economy, the imbalance was corrected by an adjustment in the value of the nation's currency. This currency devaluation would restore the supply-demand and credit-debt balances between mercantilist and consumer nations.

Absent the euro today, the Greek drachma would fall in value versus the German mark, effectively raising the cost of German goods to Greeks, who would then buy fewer German products. Greece's trade deficit would shrink, and lenders would demand higher rates for Greek government bonds, effectively pressuring the government to reduce its borrowing and deficit spending.

But now, with all 16 nations locked into a single currency, devaluing currencies to enable a new equilibrium is impossible. And it leaves Germany facing with the unenviable task of bailing out its "customer nations" -- the same ones that exploited the euro's strength to overborrow and overconsume. On the other side, residents of Greece, Italy, Spain, Portugal and Ireland now face the unenviable effects of government benefit cuts aimed at realigning budgets with the productivity of the underlying national economy.

While the media has reported the Greek austerity plan and EU promises of assistance as a "fix," it's clear that the existing deep structural imbalances cannot be resolved with such Band-Aids.

Either Germany and its export-surplus neighbors continue bailing out the eurozone's importer/debtor consumer nations, or eventually the weaker nations will default or slide into insolvency.

Germany helped enable the overborrowing of its profligate neighbors by buying their government bonds. According to BusinessWeek, German banks are on the hook for almost $250 billion in the troubled eurozone nations' bonds.

Now an inescapable double-bind has emerged for Germany: If Germany lets its weaker neighbors default on their sovereign debt, the euro will be harmed, and German exports within Europe will slide. But if Germany becomes the "lender of last resort," then its taxpayers end up footing the bill.

If public and private debt in the troubled nations keeps rising at current rates, it's possible that even mighty Germany may be unable (or unwilling) to fund an essentially endless bailout. That would create pressure within both Germany and the debtor nations to jettison the single currency as a good idea in theory, but ultimately unworkable in a 16-nation bloc as diverse as the eurozone.

Be wary of the endless "fixes" to a structurally doomed system.

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FunkyMonkeyBoy's picture

But the Euro notes look pretty!... the U.S. dollar looks worse than monopoly money, at least they have color.

SheepDog-One's picture

We can just get a new US dollar with a 3D pic of a tropical aquarium on it, blow all the other fiats away!

AcidRastaHead's picture

Putting art on the dollar may be the only way to increase it's value.

tiger7905's picture

Highlights from Don Coxe on Spain and Greece. He spending 2 weeks in Spain currently.

Clueless Economist's picture

I advise Germany to print more fiat money and pay off all of the Greek debt.  This stimulus will lead to millions of shovel-ready government jobs throughout the Euro zone.

It would have worked in USA if only we had the willpower to stimulate more trillions of fiat currency.

SheepDog-One's picture

And who knows, all those Greek politician escape tunnel cleaning jobs may just unearth long forgotten fat sacks of gold!

Piranhanoia's picture

There are thousands of shovel ready jobs in every country. They will not require any investment whatsoever. It is simply a matter of arresting and trying those that have openly stated they committed crimes.  There are hundreds of thousands of economists and wall street players that can be fitted with shovels, orange jumpsuits and manacles. It has a two fold effect.  It will end the reliance on pretense regarding financial stability, and put those that caused it to work doing the jobs the people they raped and killed were doing.  Those people will be their leaders in prison. Their support network, their pimps.

Atomizer's picture

We were planning to release 1.1 billion new (eye candy) $100 bills into circulation but they contained flaws. Canada is presently printing new laundry-friendly plastic banknotes.

fonestar's picture

I hate all of the modernist concepts of today's banknotes.  I actually like the traditional Greco-Roman inspired motifs with calligraphy of US/UK currency of decades ago.  Looked serious.  Everything else looks like monopoly money.

Then again, I hate everything else in the world today too.

Reptil's picture

Guilders were much prettier. And stronger.. (of course we took a hit when switched)

KCMLO's picture

didn't they used to have a bar code on there as well?  I remember looking at a guilder note and thinking it looked like one hell of an acid trip!

Reptil's picture

yeah the good old days.
the "nineties" were my "sixties" you know..

Eddyspain's picture

With Italian bond spreads at (record) 214  the EFSF is dead on arrival.

Vergeltung's picture

excellent read. very well explained for the novice (like me).


Vergeltung's picture

how does what I typed above deserve a junk? this place is wierd....   :\


SheepDog-One's picture

Euro longs throwing a tantrum.

Dapper Dan's picture

someone 2-3 months ago said they junk to indicate comments that they have read. don't remember who.

Baron Robber's picture

you made an honest comment, don't worry about being junked.

Piranhanoia's picture

There be free speech here,  fear not. 

Rocket-Man's picture

Ignore the junk... you are spot on.  This article provides a simple and clear explantion of some of the systemic European macro economic issues.  As you mentioned it is a good read for the novice and worthy of passing on.

Greyhat's picture

Not really. The commentators always forget that Germany IS already the "lender of last resort" by an abused TARGET2 crediting system.

The EU actually lives from bankruptcy fraud. They buy German goods, but the other EU central banks dont pay the bills to the Bundesbank, they just transfer "the finest EU collateral possible", unrated Irish and Greec paper trash.... Actually they owe us a third of a trillion Euros.

But the commission will slaughter the "imbalanced" German export cow, so this will not continue forever.

"When assessing imbalances, account should be taken of their severity, and of the potential
negative economic and financial spillovers which aggravate the vulnerability of the EU
economy and are a threat to smooth functioning of the monetary union.
Actions to address macroeconomic imbalances and divergences in competitiveness are
required in all Member States, particularly in the euro area.

RetiredSilverBug's picture

Euro will do fine. All media channels are stuffed with anti-euro junk news, but it holds 1.4 just fine. Europe should be more active in responding to the media attack (of US and UK). They should start with voiding US credit agency license in EU. And limit US hedge funds.

tim73's picture

In the speculation economy Euro is the one always "collapsing" but in the real economy level (hey Americans and Brits, you should try that sometimes!) it is working quite nicely.

In the old days a truck driver from Spain would have needed many different currencies in his journey to Germany and Netherlands, losing needlessly money in each currency exchange.

The current crisis is a banking crisis, not currency. Banks worldwide have been stupid, too greedy and loaned too much once again to insolvent customers. USA and UK is holding up mainly due to money printing keeping their banks solvent but once that goes away, it will all collapse eventually.

Ghordius's picture

a lot of this media barrage originates from Australia, the Greek Expat community is worried and enraged - what easier quick scapegoat then Germany and the Euro...
If only things were so simple!
Greece could try to adress the issue of 7 times more civil servants then what other countries need, an issue which would bankrupt anybody, anytime...

SheepDog-One's picture

BIG haircuts must be taken by the central banksters, just that none of them want to be first in line for the barbers chair what we'll see unfold is zombie world bankster battles to the death. Should be great.

john39's picture

sure, but that is really not why the bankers push.  its only paper money anway.  They want to leverage the debt issue to get control over hard assets.  taking a haircut alone won' t get that done.  the whole point is to steal real assets in exchange for fiat debt.

tim73's picture

The same logic could be applied between Alabama and New York...or Scotland and England. USA states among themselves are as "incompatible" as Eurozone nations. 

SheepDog-One's picture

Yes, exactly. For all the Eurozone problems and bankruptcies and failures, its nothing compared to the staggering US default looming. Wait till it comes around to us in a month or so.

SheepDog-One's picture

Greeny, is that you junking? I know your 1.46 Euro quick trade got blown out of the water, but dont throw a tantrum its unbecoming.

RobotTrader's picture

Crude and gasoline at LOD.

CRB Index just crashed to new lows for the year.

Uncle Gorilla has succesfully "whipped inflation" for now, using margin hikes, paper contract shorting, and unleashing the SPR.

Wow, no wonder XRT is $1 from 3-year highs.

SheepDog-One's picture

Meanwhile prices are still at record highs, and all your longs are underwater.

Greeny's picture

I tell ya what, I trust Chinese, more than this article,

If Chinese are buying EUR bonds and EUR (unless you

think they are stupid), instead of $USD,

get a clue.

SheepDog-One's picture

And yet your 1.46 Euro long trade is more underwater. Dont fight it, be a real trader, admit you were wrong and move along, oh master trader.

Greeny's picture

Dude, did I told you to hold for 1 year? I made 50 pips, that's

all it matter, was hoping for more though.. Next time, ones

Austerity plan passes, Next week?

SheepDog-One's picture

OH that was a 'buy n hold for 1 year trade' now I see. Well Im not a 'buy and hold' in anything thats the biggest bunch of nonsense in history.

Just 1 question though, why did you sell at a 50 pip when you said a 300 pip was in the bag? I guess youre just THAT good....

jointhewave's picture

Watch the YouTube video...

The Manchurian President - A story of war and deception


Absolutely amazing, cunning and enlightening short film depicting the collapse of Empire America.

JimBobOMG's picture

Is this going to be in 3D?

Greeny's picture

So, my cut is that, NO Currency would be allowed to collapse,

either whole System collapses at ones, or they all (currencies)

going to

be just overprinted and devaluated. If need it, Fed will print

enough to bailout entire Euro-zone, to save the system.

SheepDog-One's picture

Go print $100 trillion....nothing at all would be fixed. Your thesis is garbage.

Conor's picture

It seems to me that Germany's problem with Greece is more easily solved than say Texas's problem with California.

Germany can pick up it's marbles and go home, take a big hit upfront and recover.  Texas, or any other state for that matter, can't just run from the US contagion, e.g. terminally ill banks in New York and and dying states like Michigan and Illinois.

Or am I stupid?

NotApplicable's picture

The elites have gutted Germany twice in the last century, and my guess is they'll do it again, as that ole coercive force known as 'collective guilt' will be applied heavily by the MSM painting Germans as once again unwilling to cooperate with the rest of the "civilized world." All while stirring up neo-neo-Nazi sentiments at home.

Treaty of Versailles, redux?

walküre's picture

Over my dead body, Freund.

And you can take that to the bank.

Fool me once, shame on me

Fool me twice, shame on you

Germans are a different breed today. Collective guilt is a thing of the past.

Pchelar's picture

Well they can, but....  The last time it was tried 150 years ago, it got messy in a hurry.

svendthrift's picture

A sovereign nation should have a sovereign currency. No, bank produced debt-notes don't count.

SheepDog-One's picture

Thats right, the 'one size fits all' New World Order plan is garbage, it will never work. And probably about 5 billion will have to die before the elites admit failure.

pops's picture

Why do you assume that they would consider the deaths of 5 billion to be a failure?  Their agenda could very well be to thin the herd, and this currency squaredance is just a warmup.

kote's picture

Well written, good argument, just technical enough.  I like this guy.

Atomizer's picture

Now that you understand the frame work, watch this to simplify it even more.

Christine Lagarde is a bailout queen. Hence the push for IMF appointment.