A sceptic’s solution – a breakaway currency
- Hans-Olaf Henkel
Having been an early supporter of the Euro, I now consider my engagement to be the biggest professional mistake I ever made. Here are the reasons:
First, politicians broke all promises made in the Maastricht agreement. Not only was Greece let into the Union for pure political reasons, the fundamental rule, “no member to exceed its yearly budget deficit by the equivalent of 3 percent of GNP”, was broken over a hundred times. Mandatory punitive charges, provided for such cases, were never applied. To top it all: the “no-bail-out” clause was wiped out in the wake of the first “Greek rescue package”.
Secondly, the “one-size-fits-all” Euro turned out to be a “one-size-fits-none” currency. The Euro itself caused some of the problems politicians now try to solve. With access to interest rates at much lower German levels, Greek politicians were able to pile up huge debts. The Bank of Spain helplessly watched the build-up of a real-estate bubble without the possibility to raise interest rates. Deprived of the ability to devalue their currency, countries in the South lost their competitiveness.
Thirdly, instead of uniting Europe, the Euro increases friction. Students in Athens, unemployed in Lisbon and protesters in Madrid not only complain about national austerity measures, they protest against Frau Merkel. Moreover, the Euro widens the rift between countries with the Euro and those without. Surely, Romania loves to join and enjoy German guarantees, but does anybody believe Britain or Sweden will ever find it attractive to join a transfer union? Meanwhile, the dissatisfaction with the Euro drags down the acceptance of the EU itself, by both the people in the North and the South.
Instead of addressing the true causes of his illness, politicians prescribe pain killers to the Euro patient every time another “Greece”, “Portugal” and “Ireland” pops up. He suffers from three discrete diseases: 1. As a result of the financial crisis, many Banks are still instable. 2. The negative effects an overvalued Euro has on the competitiveness of the “South”, including Belgium and France. 3. The huge level of debt of some Euro zone countries.
Treating a patient who suffers from three diseases simultaneously is indeed difficult, and it would be misleading to proclaim that there is an easy way out. But it is irresponsible to maintain there is no alternative. There is.
Plan ”A”: “Defend the Euro at all cost” as pronounced by President Barroso. He could have added “...to the Germans, the Dutch, the Finns”. The end result will however be detrimental to all. Various rescue packages have led the Euro zone on the slippery path towards the organized irresponsibility of a transfer union. If everybody is responsible for everybody’s debts, no one is. Competition between politicians in the Euro zone will focus on who gets most at the expense of the others. Harmonization will replace diversity. The result is clear: more debts, higher inflation, lower standard of living, but, and that will please a lot of Politicians, whatever is left of it will be more evenly distributed. The competitiveness of the Euro zone is bound to fall behind those of other Regions in the world and, by the way, will over time also fall behind those European countries which refuse to be part of it.
George Soros’ Plan “B”: “A Greek default or her departure from the Euro zone” – or any other for that matter - implies risks too high to take. First in Athens, then in Lisbon, Madrid and perhaps Rome people will storm the banks as soon as word gets out. A “hair cut” would not improve the country’s competitiveness either. Soon, the Greeks will have to go the barber again. Anyway, we now talk also about Portugal, Spain, Italy and, I am afraid, soon France.
That’s why we need a Plan “C”: “Austria, Finland, Germany, The Netherlands get out of the Euro zone” and create a new currency leaving the Euro where it is. If planned and executed carefully, it could do the trick: a lower valued Euro would improve the competitiveness of the remaining countries, incite their growth. In contrast, exports out of the “Northern” countries will be impacted but they will enjoy less inflation and be spared to look after the “South” forever. Likely, some non-Euro countries are to join this second monetary union. Depending on actual performance, a flexible membership between the two should be made possible.
The implementation of Plan “C” requires that each of the three underlying problems is addressed separately.
1. We must rescue banks, not countries. Stabilization of Banks on a national level should replace current European umbrellas. In many cases, this requires temporary nationalization of Banks.
2. Germany and its partners in a new currency must forego a significant portion of their guarantees to help refinance Greece, Portugal and others. As much of it is already lost anyway, an acceptable price for an “exit ticket”.
3. The creation of a new Central Bank based the Bundesbank, preferably not led by a German. The name of the new currency should not be “D-Mark”.
4. The mechanics would be similar to those used getting into the Euro. If it was possible to form one currency out of 17, it should also be possible to form two out of one.
This will not be an easy task, politically and mechanically, but we need to focus on saving Europe, not the Euro. This requires conviction, persuasion and foremost courage of Chancellor Merkel. Paradoxically, help could come from the South, where voters are getting tired of being lectured by her of what to do. For both, “North” and “South”, an end with difficulties seems much better than difficulties without an end.
Hans-Olaf Henkel war Präsident des Bundesverbandes der deutschen Industrie und Vorsitzender der Geschäftsführung von IBM Deutschland. Er ist Autor mehrerer Bücher und einer der führenden Wirtschaftswissenschaftler in Deutschland. Dieser Kommentar erschien im Original in englischer Sprache in der FINANCIAL TIMES.