Building a Better Currency Union

Belly up to the trough 

Like so many policy domains, international economic policy in the West has fallen victim to the Late Twentieth Century Delusion: 'People are people.'

Foreign policy was once the playground of race realists at every level.  The only trace of this left may be the Pentagon, who in its double-secret PC-proofed dungeon whips up instructional pamphlets aimed at keeping GIs from getting killed by letting them know some people are, in fact, Not Like Us.  (Or used to anyway.)

Back when foreign conquest was the norm, the primitive peoples of the world were seen as docile labor to exploit (rightists) or as poor backward heathen to civilize (leftists).  But what no one disagreed on was that they were, in fact, primitive.  That is to say, Not Like Us.

De-colonization, the U.N., etc. at last clued us in to the fact that everybody on planet earth was, in fact, just like us.  International economic policy has thus taken on a rather surreal cast, as on the one hand the West insists that Africa is its equal, but on the other hand sets up trade agreements with her that make her appear, decades after de-colonization, to be a slightly retarded child.

One current example of the perils of 'People are people' is that of the European Monetary Union, or Eurozone.  Conceived in the chaos of the waning days of Bretton Woods, it aimed to be something entirely new--a monetary and economic union of several large sovereign states.  The hard work of Jacques Delors, among others, made it all happen.

(The British, then as now, were not enthusiasts.)


Ten years later, it all seems to be falling apart. (Don't be fooled by the lull in hysterics; disintegration continues apace.) Economists are openly warning that to survive, the Eurozone will have to split in two.  Yet the 2011 EU decision-makers seemed totally baffled by the meltdown. Why?

The reasons are many; we shan't look at all but only one: People aren't people.



The Eurozone, some have surmised, was at its heart an attempt by the French to neuter fearsome Germany once and for all.  The German cities and states had long been wealthy trade centers, but unification in 1871 gelled them into a power that brought Europe to its knees.  Germany was, in a word, scary.  Forcing her to entwine her fiscal fortunes forever with those of Mediterranean Europe... what better way to leash the giant?

So how did it happen?

As Bretton Woods broke down, several European states began to peg their currencies to each other:  The European Monetary System (EMS) was born.  The end goal was a single currency for all of Europe, with liberté, égalité, and fraternité for all.  But there was always a niggling problem.

During this time [1983-87], the Deutsche mark evolved as the anchor currency of the system, and the anti-inflationary policies of the Bundesbank became the reference point for partner countries....

There were perceptions that the system was "asymmetric" because of the dominant role of the Deutsche mark...

In the wake of the Wall Street crash of October 1987, ...international funds sought refuge in the Deutsche mark, and strong tensions developed within the ERM [European Exchange Rate Mechanism]... (1)

What to do when the dream of equality bumps up against the reality of superiority?

While Germany may have chained herself to this shaky ship to atone for her WWII sins, for the weaker southern economies it was basically a free-cash bonanza. (Much like EU accession).

Once they had joined the euro zone, Europe's southern countries gave up trying to sort out their finances, says [ex-Finance Minister] Papantoniou. With a steady flow of easy money coming from the northern European countries, the Greek public sector began borrowing as if there were no tomorrow. This was only possible because the country, in becoming part of the euro zone, was also effectively borrowing Germany's credibility and credit rating.

Then the 2008 world credit crunch hit and the tide went out, revealing who was not wearing a bathing suit.  Unpayable debts, hand-wringing, finger-pointing, late night negotiations, harried Brussels press conferences, riots, tear gas... Time to throw in the towel?

I. * COMMONWEAL-ORIENTATION *

Were the EU decision-makers to cave in and admit it's time to build a better currency union, where could they start?  This anecdote may help:

Almost all of the many factories and warehouses in [northern Greece's] industrial zone of Komotini are now shut down, and yet they look as if they were brand-new.

Most of the companies there never even opened their doors for business. In fact, the abandoned buildings are the ruins of subsidy fraud. Their developers obtained funds and low-interest loans from the government in Athens and from the EU to build the factories and warehouses, but they never intended to do any business there.

...Transparency International considers Greece to be the most corrupt country in the EU. Permits and certificates can only be had in return for cash. Not everyone in Greece sees this as a problem. Some see corruption as part of Greek culture, and they also believe that taxes are unnecessary. ...  the businesses that do grow and realize profits find ways to pay almost no taxes at all. Every year, the Greek state misses out on an estimated €20 billion in unpaid taxes. A third of Greece's economic activity is untaxed.

Transparency International--NGO which sends poll-takers all over the world each year to ask the Joe on the street how corrupt he thinks his country is.  The not-at-all ethnically suggestive ranking that begins like this:

And ends like this:

Ethnic-Euro countries only?:

Or, to look at it another way,

The World Values Survey also publishes data on societal trust levels:

Southern Europe's far lower trust levels have been attributed among other things to their excess of 'amoral familism' (or 'altruistic nepotism'), that is an intense loyalty to one's family / clan coupled with indifference or hostility to the larger society.

What it means for a currency union is that such a society is likely to made up of (1) shoppers who are happy to forego their receipt at the grocery (wink wink), (2) business owners who avoid paying taxes, (3) tax inspectors happy to let you off the hook in exchange for a fat envelope, and (4) elected officials happy to let anything happen in exchange for a fat envelope.  Everyone, in a word, is on the take.

Data source

How can that co-exist in the same currency union with this?

[Finance Minister] Jörg Asmussen ... is a type familiar in Germany but absolutely freakish in Greece—or for that matter the United States: a keenly intelligent, highly ambitious civil servant who has no other desire but to serve his country. ... When I asked another prominent German civil servant why he hadn’t taken time out of public service to make his fortune working for some bank, the way every American civil servant who is anywhere near finance seems to want to do, his expression changed to alarm. “But I could never do this,” he said. “It would be illoyal!”

II. * FUTURE TIME ORIENTATION *

Another must-have among the members in a currency union is a similar level of future-time orientation.  Those who think little of the future tend to borrow freely and save rarely.  As a government, when your creditors think you can't pay back your debts, they start charging you the same interest rates you get down at the payday loan palace and it's all downhill from there (witness current EU meltdown).  But how could one assess such a trait in a future currency union co-member?

From self-reported values studies such as the GLOBE study (late 1990s), or the latest international laboratory study on future orientation (Wang et al. 2011):

 One could consider the monetary investment made in educating the young:

 One could evaluate a country's debt-to-GDP ratio:

III. * WEALTH CREATION *

Roughly similar economies can also help a currency union run well.  In their absence, an optimum currency area must have

A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected...This usually takes the form of taxation redistribution to less developed areas of a country/region.   (Frankel and Rose, via Wiki)

GDP per capita in W. Europe, 2006 (pre-crisis):

Of course, when it comes to running a modern economy, there are quantitative indicators, and then there's good old-fashioned observation.

Albert Gehring mentioned in 1908 one notable trait of the 'Teuton':

There is a deliberation and hesitation about the actions of Germanic people which contrasts sharply with the vivaciousness, of their southern cousins. ... The persistency of the Teutons is shown in the patience and diligence of the German labourer, the tedious researches of the university professor, the dogged resistance of the English soldier, and the indomitable energy of the Yankee speculator. It may account for their marvellous success in colonisation and their mastery over the material world; for the commercial prosperity of the Dutch during the 17th century, the English supremacy of the last hundred years, and the German and American emergence of to-day. (2)

One hundred years later, and ten years into the Euro project, Der Spiegel's verdict:

In the end, only two possibilities [for the Eurozone] will remain: a transfer union, in which the strong countries pay for the weak; or a smaller monetary union, a core Europe of sorts, that would consist of only relatively comparable economies.

Financial Times is even more blunt:

That is why we need a plan “C”: Austria, Finland, Germany and the Netherlands to leave the eurozone 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 and stimulate their growth. In contrast, exports out of the “northern” countries would be affected but they would have lower inflation.

*       *       *

If a price is information, then a currency is reputation.  Why have both of the dominant world reserve currencies of the last hundred fifty years been issued by Anglo-Saxons?  Why are seven of the eight most popular reserve currencies in the world today issued by ethnic North Europeans? Why are current bond yields for Mediterranean Eurozone members so very much higher than those for North European members?

Does a currency, like a government system, reflect the people who created it?

Any currency, like any government, can undergo a sharp shock.  No country is immune to the hysteria of an investment bubble, the aftermath of a war or natural disaster, or a speculative attack.

But why, over time, do some peoples seem to issue currencies that just inspire confidence?

Image source 

One final word on the Greek calamity:

 [Economist Christophoris] Sardelis claims that he had recognized the looming problems and warned against them. Today, he describes a mood characterized by the ever-increasing "illusion that the monetary union could solve our problems." But instead of pushing for serious reforms of Greek government finances, the Greeks simply "relapsed into old mentalities." Instead of saving being promoted, obtaining "as much money as possible" was encouraged.

'Old mentalities' do not disappear with the flick of a eurocrat's wand. From Vanity Fair's 2011 conversation with German Finance Minister Asmussen:

He couldn’t put it more bluntly: if the Greeks and the Germans are to coexist in a currency union, the Greeks need to change who they are.

Building a better currency union means not expecting a people to change who they are.  It can't be done.  If Griggs and Hocknell are correct that there are over one hundred 'nations' in Europe, then there is surely much more separating Germany and Greece than Kölsch and moussaka.  This patchwork of peoples is already more precarious than it may seem.

Image source 

The more able and the less able have always found a way to co-exist, be it empire, slavery, tribute, 'national unification,' or neo-colonialism.   The North will keep paying for the South in Italy, and in Spain, and in Belgium...  But will northern Europe keep paying for her southern half?

Despite all attempts at leashing her, Germany's seeming economic superiority vexingly bubbles to the surface. One wonders what legacy it shall leave:

Before Germany's [Eurozone task force member] Horst Reichenbach had even stepped off the plane in Athens, the Greeks knew who was coming. He had already been given various unflattering nicknames in the Greek media, including "Third Reichenbach" and "Horst Wessel" -- a reference to the Nazi activist of that name who was posthumously elevated to martyr status. The members of his 30-strong team, meanwhile, had been compared to Nazi regional leaders.

The taxi drivers at the airport were on strike, while hundreds stood in front of the parliament building, chanting their slogans. One protestor was wearing a T-shirt that read: "I don't need sex. The government fucks me every day." Within the first few hours, Horst Reichenbach realized that he had landed in a disaster area.

EU policy-makers take note.

Previously:

A German by Any Other Name,
More Able and Less Able,
Letting Things Slide

REFERENCES:
(1) Ungerer, Horst, A Concise History of European Monetary Integration: From EPU to EMU. Westport, Quorum Books, 1997.
(2) Gehring, Albert, Racial Contrasts: Distinguishing Traits of the Graeco-Latins and Teutons. NY: G.P. Putnam's Sons, 1908.