January 16, 2019

What good is it to celebrate the euro’s first 20 years if, as is, it won’t make the next 20?

Sir I refer to Martin Wolf’s “Marking the euro at 20: the eurozone is doomed to succeed” January 16.

November 1998 in an Op-Ed titled “Burning the Bridges in Europe” I wrote: 

“As participants in a globalized world in which Europe has an important role, we must naturally wish all members luck, no matter what worries we might secretly harbor.

The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. The Dollar is backed by a solidly unified political entity, the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. 

Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

Sir, twenty years later those observations are still valid, and way too little has been done to solve the challenges.

Now add to that the fact that even though Eurozone sovereigns take on debt in a currency not denominated in their own domestic printable one, EU authorities have assigned a risk weight of 0% to all of them. That all points to that it will end badly.

So Sir, though Martin Wolf raises many more or less valid alerts and gives some recommendations worth heeding, he should also be thinking about how to get the euro out from that “0% risk” death-trap corner into which it has been painted.