Why the Euro is doomed to die
On January 1st, 1999, began one of the biggest economics ‘experiment’ in the modern history, and one of the most meaningful financial disruptions since the creation of gold coins as the official store of value, by King Croesus of Lydia from Turkey area at 550 BC.
At January 1999, the European Union (EU) met at Lisbon in Portugal and decided to use one unified currency - the euro. First, the currency was born virtually and in 2002 paper notes and coins began to circulate.
The beginning of the Euro was very promising, as almost all European countries were standing in line to join, aside from a few exceptions (UK, Sweden, and Denmark). The small countries of Europe were the most enthusiastic. They were willing to do anything in order to join.
At the time, it had seemed to them that they are entering an economic heaven. One with low-interest rate loans, deduction of trade barriers, and an unlimited direct money supply from the EU central bank.
What no one told these unfortunate countries, was that they are entering into a financial trap. This trap will work slow, but effectively. So, at the end, they will lose their money and capital. They will lose a big part of their educated population. They will lose their financial independence. They will suffer a growing budgetary deficit. They will lose their tools set to manage their financials crises. And the worse thing is, that they will not see it coming.
But like any good trap, the beginning of the union to those countries was nothing resembling the future to come. At the beginning, those countries experienced a major economic growth. They were exposed to low-interest rates loans. The loans interest rate was the same now for all EU countries. So, Greece and Germany would have the same interest rate. And so, they all use those loans with large quantities.
Money flows to the center
Money flows to the center. It is a basic economic rule. It is pure and simple. If you are an investor and should invest your money. You better invest it in Germany than in Greece. Your investment worth more in Berlin than in Athens. Money flows to the center.
So, after few years of a solid and steady process, countries such as Greece and Portugal started to suffer from a growing budgetary deficit. And now it was their time to pay their debt. But because money had flowed to the center, there is no way they could do that. So, what’s the solution they came up with? Of course, to take more debt to cover the old ones. It is an ongoing and steady process for those countries to enter into bankruptcy.
In the past, when such crisis happened, they would have had the tools to handle it. They could do devaluation of their currency in order to reduce their debt. But now they can only stand still and watch it increase.
Greece went into bankruptcy. Portugal also went into bankruptcy. Other countries are expected to follow. And it is all due to the basic and simple economic rule that money flows to the center.
People follow the money
Not only money flows to the center, people too. People follow the money (no surprise here). Today, almost quarter of Germany population is foreign, and the numbers increase each day.
Latvia’s story tells it all. Latvia is a nice eastern-northern European country, which had a small population of 2.25 million, when entered the EU at May 1st, 2004. Since then, it suffered a heavy negative migration. Its population decreased by 12%, only 8 years after joining the EU. At 2013 Latvia’s population number decreased to 2 million, and the pace continues to flow.
The strong help the weak, or do they?
So, we have the Euro, and countries are falling into bankruptcy. What’s next? How do we solve it? The solution is simple but yet impossible to execute. In economics, there are breaks and balances. We already understand by now that money flows to the center. So, how can we stop it? what balance do we use? Well, we can’t stop it, but we can balance it by dividing the resources differently. It’s a well-known fact that in each country, the rich areas sponsor the poor. At the US for example, New York sponsors Ohio. California sponsors New Mexico. And Texas sponsors Mississippi. They can do that because they have only one humanitarian economic system, and the government can divide the resources between the strong and the weak. They can take taxes from the rich and give them to the poor.
This could never be done in Europe. There is no way on earth that Angela Merkel, chancellor of Germany, can convince a German citizen that his taxes should finance the (lazy) citizens of Greece. Hell No. It would never happen.
So, what’s next?
What’s next is that we will see a chain of EU countries falling into bankruptcy. Greece and Portugal are already there. Cyprus is on the edge. But this is only the beginning. Things will really begin to get interesting when Spain and Italy will go into default. There is a cynical joke in Europe, that Germany had failed to conquer Europe in two world wars, so they decided to conquer Europe with the Euro. Angela Merkel already sets the tone for the EU and dictates the criteria for small countries of receiving more funds. And those criteria are harsh ones.
In order to receive more funds, aggressive budget cuts are requested. These budget cuts reduce economic activities, which accelerate the process of money flows to the center (or should I say, money flows to Berlin). This creates a loop of economic contraction, which only enhances the crises. It’s a no-way-out situation.
This situation is unsustainable. It could never last for the long run. There are only two sustainable solutions. Either unify all EU countries to one country with one humanitarian economic system, the ‘United States of Europe’. Or, to be divided again into the original EU countries, with different currencies and financial independence.
The first solution is unrealistic. There are too much history and precipitation between those countries.
So, we stayed with just one valid solution, and it’s going to hurt.
Get ready for the return of the German Mark, the French Franc, the Spanish Peseta, the Italian Lira, and the Greek Drachma.
I feel much safer having the Israeli Shekel, nowadays.