Can the Euro Survive?

May 8th, 2010

By Tom Carter

The euro is under severe pressure right now, primarily because of economic problems in Greece, and several other countries are likely to present the same kinds of problems in the near future.  There’s an excellent article in Newsweek that details the problem and discusses why it’s of worldwide importance.  Most Americans aren’t paying much attention to this particular problem, but they should be.

The European Union itself is riddled with problems associated with the sovereignty of individual states.  Basically, the 27 countries of Europe which are EU members have given up a measure of sovereignty, but on critical questions they’re likely to pursue their own policies.  It also serves as an economic leveling force — the stronger countries prop up the weaker ones.  That’s an important reason why many weak countries in Europe are eager to join the EU.

The next logical step in growth of the EU was development of a common currency, and that resulted in the euro.  At this moment, 16 countries are in the eurozone, meaning that they’ve given up their national currency.  Several other countries use the euro as their official currency even though they’re not part of the eurozone.  When countries join the eurozone, they essentially give up national control of monetary policy, while retaining control over most fiscal policy.

I’ve always thought the EU was a bad idea for the stronger and more productive countries of Europe, and many Europeans feel the same way.  Joining the eurozone just makes that problem worse, which explains why some countries in the EU, most notably the U.K., have refused to join the eurozone.  Their decision looks pretty wise at this point, with the future of the euro very much in question.

The economic powerhouse of the eurozone is Germany, and propping up the weaker states creates a greater burden on Germany than on other countries in the zone.  But the people of Germany are less than happy about bailing out Greece.  For one thing, the government of Greece up until recently has been reporting bogus data on their economic situation.  For another thing, the social welfare system in Greece is far more generous than in Germany, as indicated by this chart comparing pension systems in the two countries:

Germans understandably don’t want to sacrifice to bail out another country whose citizens receive significantly greater benefits than they receive.

Greece is in such serious economic difficulty now that it can’t recover without massive outside assistance, and it’s doubtful that even that will solve the problem for the long term.  It looks now like Greece may face a national default and have to leave the eurozone, voluntarily or otherwise.  That, plus looming economic problems in several other countries, makes the future of the euro look doubtful.

One of the important lessons here is that powerful, productive countries can’t carry the load of weak, much less productive countries.  Germans are who they are, and Greeks are who they are.  That reality applies across the entire EU.  The problem of the moment may be avoided, but it won’t go away.

If there are Americans who look at the problems of the euro with schadenfreude, they would be well-advised to consider the economic problems facing the U.S.  With huge and growing deficits and an unsustainable long-term debt plus lack of will to increase taxes or cut spending, the U.S. in a few years will also be an economic basket case.  The difference is we won’t be able to expect the strong, productive countries of Europe to save us.

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2 Responses to “Can the Euro Survive?”

  1. Brian |

    The Euro has as much chance of surviving long-term as the dollar does. It is backed by nothing but fantasy, same as the dollar.

  2. Tom |

    I’m sure both currencies will survive for quite a while, mainly because there’s no practical alternative.

    The Europeans have apparently gotten their act together, at least to some degree, so the euro will survive the present crisis, if in a somewhat weakened condition. That’s good for everyone because the collapse of the euro would wreak havoc with the world economy.

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