You’re-O-Failure

The euro appeared virtually in 1999 and started to circulate as a solid currency in 2002. 16 out of the 27 members of the European Union (EU) use the euro in what is called the “euro zone.” It was created to unify the many currencies of the EU. Extensive studies published before the launch of the euro promised euro zone members high growth, reduced inflation and that they would be protected against all sorts of external economic disasters.

Did Anybody Czech That?

Well Czech Republic President Václav Klaus sure did. He wrote a bubble bursting essay about the euro published by the the Wall Street Journal.

The Czech Republic joined the EU after communism failed in 1989. Yet they did not accept the euro (they are one of the eleven in the EU but not in the euro zone.) But, Klaus fears that the problems with the euro will go outside of its users and effect the EU as a whole.

Klaus states, “The European ‘soziale Marktwirtschaft’ is an unproductive variant of a welfare state, of state paternalism, of ‘leisure’ society, of high taxes and low motivation to work. The existence of the euro has not reversed that trend.” In fact, the growth promised in the reports never came, and members of the euro zone have been going down in growth.

The European Central Bank shows declining growth. 3.4% in the 1970s, 2.4% in the 1980s, 2.2% in the 1990’s and from 2001 to 2009 (the decade of the euro) growth was 1.1%. Klaus points out, “Even Otmar Issing, the former member of the Executive Board and chief economist of the European Central Bank, has repeatedly pointed out (most recently in a speech in Prague in December 2009) that the establishment of the euro zone was primarily a political, not an economic, decision. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.”

The euro has failed to maintain it’s promised stable, low inflationary growth. Countries in western and eastern Europe do not have a particular inflation issue, but other euro zone countries (such as: Greece, Portugal and Spain) have endured hardships that weren’t in the “euro zone member brochure.” Much of Greece’s problem was due to massive spending. Their debt-to-GDP (that is, how much of the gross domestic product of Greece is  up by their debt) is 124.9%.  As Forbes‘ Thomas F. Cooley puts it, “The drama is just beginning.”

With Greece and others failing, a bailout was provided by euro zone countries and the International Monetary Fund (IMF) that came to around $147 billion. But that didn’t cover it. Then EU finance ministers moved to lone $645 billion to Greece and an unknown sum from the IMF all in the name of saving the euro from a shattered confidence. But throwing money at the problem doesn’t exactly solve it. Besides, why give money to a country that is irresponsible with it anyway?

Klaus describes the euro as the “‘straight jacket’ of a single currency [which has] become more and more visible.” When economic times were good, no problems were seen. But when downfalls came the “lack of homogeneity manifested itself very clearly. In that sense, I dare say that—as a project that promised to be of considerable economic benefit to its members—the euro zone has failed.”

If the euro is such a failure, will the euro dissolve for countries to find their own way? Klaus says no.

It will continue, but at a very high price—low economic growth. It will bring economic losses even to non-members of the euro zone, like the Czech Republic.

The huge amount of money that Greece will receive can be divided by the number of the euro-zone inhabitants, and each person can calculate his or her own “contribution.” However, the “opportunity” costs arising from the loss of a potentially higher growth rate, which is much more difficult for a non-economist to imagine, will be far more painful. I do not doubt that for political reasons this price will be paid and that the euro-zone inhabitants will never find out just how much the euro truly cost them.” Czech Republic President Václav Klaus with the Wall Street Journal, June 1, 2010

Is there any solution to this endless circle? Absolutely. In fact, members of the EU have already taken steps and experienced positive results. Lithuania is an excellent example. They slashed government spending by 30%, cut public-sector salaries by 20% to 30% (the prime minister himself got a 45% salary cut), and kept corporate tax rates at 15%. Steve Forbes (editor-in-chief of Forbes magazine) states, “In fact, before the crisis the Lithuanian economy had been on fire. Lithuania was one of the pioneers of the flat tax, and it had also instituted a currency board to fight inflation.” Latvia, Estonia and Ireland have taken similar measures and things are looking much better for them than Greece, Spain and Portugal.

While the euro may be considered a failure, hope lies not in government spending, bailouts or inflation. But quite the opposite. Cutting government spending, reigning down inflation, and cutting income taxes. A lesson we could use at home.

-Ben

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