Eurozone's Failed Common Currency

by John M. Curtis
(310) 204-8700

Copyright November 28, 2010
All Rights Reserved.                                

             Panic in the Eurozone related to high levels of debt and bailouts among its 16 common currency states raise serious doubts about Euro’s future.  When the Euro launched Jan. 1, 1999, questions were raised about coverting Europe’s disparate economies into a one-size-fits-all currency, especially those nations with relatively weak manufacturing or exporting bases.  Based in Frankfurt, Germany, the European Central Bank converted Europe’s notoriously weak and vacillating currencies into the stability found in the German Deutsche Mark and French Franc.  When the conversions were made over a five-year period before the Euro launched, the collective euphoria didn’t last long with poorer countries realizing that they no longer coined currency, realizing their currency didn’t give them a fair Euro exchange rate, leaving banks and businesses short of cash.

            Greece and Ireland’s recent financial woes directly relate to the failure of the common currency, leaving social welfare and pension systems unfunded in Euros.  Since there’s no common tax base or revenue stream in the Eurozone, the Central Bank must print Euros and spread the debt among its 16 member-states.  Frankfurt-based European Central Bankers now controls the purse strings of all Eurozone members, in effect imposing German control over Europe’s diverse economies.  Weaker economies were supposed to benefit from stronger exporting countries like Germany but instead forced an inequitable conversion of individual state-currencies into more high-priced Euros.  Without the capacity to print money, incur debt and repay loans, Eurozone’s economies ran out of cash.  Coughing up $89 billion Euros to bailout out Ireland only postpones the day of reckoning.

            No European economy can afford to repay the ECB’s high-interest loans nor can they continue the inflated valuations.  When Greece threatened economic default in February, the ECB and International Monetary Fund coughed up $110 billion Euros, demanding that Greece tighten its belt by slashing government medical care and pensions.  Riots broke out in Athens related to Frankfurt’s heavy-handed policies, blaming NATO’s southern outpost for gross fiscal mismanagement.  In reality, Greece couldn’t covert in Drachmas into Euros without under-funding its pension and social welfare systems.  Eurozone’s current problems have more to do with disparities in Eurozone’s individual economies.  Greece and Ireland can’t compete with Germany, France, Netherlands or Belgium.  Without a common tax base, the ECB can only print more Euros and spread the debt to member-states.

            Euro’s overvaluation was based largely on the aggregate Gross Domestic Prodcucts of its 27-nation members.  Taken collectively, the GDP exceeds $16 trillion or roughly two trillion dollars more than the U.S.  But, unlike the U.S., there’s no common tax base from which to fund pension and social welfare programs.  Eurozone’s Beligium-based central headquarters has unrealistic GDP-to-debt ratios, forcing poorer European countries like Greece, Ireland and Portugal, to maintain the 3% ratio as cash-rich exporting countries like Germany.  Belgium can’t have it both ways:  Expecting poor Eurozone countries to adhere to the same income-to-debt requirements as poor countries requiring more debt to function.  Bailing out Ireland only delays the inevitable:  That they can’t solve their debt crisis by continuing to pay back debt on Euros.  No poorer country can operate on a rich man’s budget.

            Irish Prime Minister Brian Cowen doubted Ireland could pay back high-priced bonds exceeding 9% without going further into debt.  Frankfurt wants Ireland to dig into the nation’s pension system before receiving bailout funds. “If we didn’t have this program, we would have to go back to the markets, which as you know are at prohibitive rates,” said Cowen, insisting Ireland would pay more.  While Ireland has a gun to its head to accept the ECB’s bailout, there’s no guarantee that it can continue on the Euro.  Unable to coin currency, Ireland begins to see the logic of the U.K. retaining its Pound Sterling, refusing to jump on Euro bandwagon.  Most of the 16 Euro nation-states have incurred massive debt converting national currencies into Euros.  Gouging the Irish with excessively high rates assures that they won’t be able to make good on the ECB’s high interest rate loans.

            Instead of confronting the Euro problem head on, European Central Bankers have preferred to kick the can down the road.  They’re hoping they can generate enough good publicity to reverse the Euro’s tailspin against foreign currencies, including the U.S. dollar.  When 16 countries jumped on the Euro bandwagon in 1999, they didn’t consider the deleterious effect of converting to a common currency.  Less industrialized countries like Greece, Ireland, Portugal, Spain, etc., can’t compete with a Euro primarily valued on the Deutsch Mark and French Franc.  Converting the Euro has decimated Europe’s pension and social welfare systems, except in prosperous countries with large exporting economies.  Without a common tax base, the ECB can only print Euros and pass the debt on to other Eurozone countries.  More crushing debt to the Frankfurt-based ECB doesn’t bode well for the Euro.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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