The Sequel to the Eurozone Crisis: How the Euro Violated the Natural Laws of Economics
In the past 30 years, the Euro is perhaps the most revolutionary idea within monetary policy. Never before has a currency been shared by so many sovereign nations upon a continental landmass. Not since the days of Rome has so much of Europe been under one currency, but even then, it was under one empire. Due to this idea, we are starting to see the ideas of currency unions proposed in other parts of the world. In 2023, Brazil and Argentina hope to create a new currency, “Sur” (Paraguassu 2023). In the past, African nations tried to create their own currency unions. While the Euro was a revolutionary idea, it was an abomination when we examine the Natural Law of Economics.
Looking at the modern world, when we examine the monetary policy of nations, we usually see that every country, outside the Eurozone, has its own currency. While a lot of smaller or financially troubled countries either use foreign currency or tie their currency to a more stable exchange, we can see that political institutions and monetary institutions generally exist on a national level. This allows the nation to deficit spend over years because it allows the country to borrow money without the fear of defaulting. Due to control over monetary policy, a country could manipulate its currency, by increasing its supply, in order to borrow more money that would normally not be available to it. This is not to say there are no consequences for this action, such as the value of the currency would decrease and thus inflation, but it allows a nation to operate with a deficit without declaring bankruptcy.
For entities that do not have control over monetary policy, they do not have this luxury. If they have consistent deficits, then their credit rating will go down. This happens because if expenses are greater than revenues on a consistent basis, it means the government does not have the ability to pay back its debt. This fear will freeze credit to these governments, thus the government must increase revenue through taxes or commit to austerity by implementing spending cuts. This is not to say these types of governments cannot have any type of debt, but rather the debt these governments have should not be for operational purposes and the expenses from this debt must be covered within the budget. To put this in perspective, in the United States, the Federal Government has a deficit every year while its States cannot.
Going back to the Euro and the Eurozone, it is important to understand that the monetary policy is on a European level while the fiscal policy is on a national level. This means every national government that is in the Eurozone does not control its own monetary policy. Using the example in the prior paragraph, imagine the American states were allowed to deficit spend despite not controlling their own monetary policy. This would be an economic disaster. Anticipating the consequences that a twenty-nation monetary bloc may have when the national governments do not need to balance their budgets, the Eurozone put in place rules that countries “must” follow. The good news is that no country is allowed to have a debt-to-GDP ratio greater than 60%. The bad news is there is no enforcement of this rule and nations do not follow it.
While I will not cover the Eurozone Crisis too much here, I will give a brief overview. Between 2009 and 2012, Greece, Italy, Portugal, Spain, and Ireland experienced a crisis wherein these governments struggled to pay back their debt. While each country had its own issues, to simplify it; Ireland and Spain experienced significant economic downturns which led to fiscal problems, Italy and Portugal had structural issues that plagued them, and the Greeks through poor accounting practices borrowed too much. The answer to solving each of these countries’ issues was bailouts, austerity, or a combination of both. Because the Europeans were afraid that if the countries could not pay back their debt, this fear would lead to the end of the Euro. To remedy any possibility of fear and restore confidence in the markets, they implemented austerity within a recessionary period (Weisenthal 2014); which is the exact opposite policy one should pursue during a recessionary period.
Did the European technocrats learn their lesson? Are the debt-to-GDP ratios at a level that are acceptable? Did the austerity and bailouts fix the problem? No… no… and no. In fact, it is much worse now. In 2008, the average Debt-to-GDP ratio of the Euro area was 69.6% and only eight nations failed to meet the Eurozone standard. Out of the eight nations, only three had a debt-to-GDP ratio above 90% and two exceeded 100% (Italy and Greece). The Greeks had the highest debt-to-GDP ratio of 109.4%.
In 2022, 12 nations failed to meet the Eurozone’s standard for debt and the aggregate debt of the Euro Area is 91.6%. Out of these nations, 6 nations exceed 100% debt-GDP and 5 exceed the Greek mark from 2008. Four of the highest countries were the same countries that had issues during the Eurozone crisis. Spain and Portugal both have debt-GDP ratios above 113%, Italy has a debt-to-GDP ratio of 144.4%, and Greece has a debt-to-GDP ratio of 171.3%. The other countries with high debt-to-GDP ratios were France with 111.6% and Belgium with 105.1%. Whenever the next recession occurs, there will be a Eurozone Crisis 2.0. Unlike last time wherein Italy did not need bailout, the future looks bleak for Europe. While Greece, Portugal, and (to a lesser extent) Spain have debts that may not be insurmountable for the Eurozone to bail out due to their size, Italy is certainly too big to fail (Canepa and Jones 2022). That is before we consider if the French will face the same trouble as the other countries. Because if Italy is too big to fail, then France is definitely too big to fail. In this worst-case scenario, three of the four largest countries in the EU will be having solvency issues; four of the five biggest economies in Europe will have a currency that is deeply troubled. (All data provided by Eurostat 2023). This was before the French riots that are now occurring in 2023. Imagine the scale of rioting all over Europe if there is simultaneous economic and social strife, especially if the economic downturn is worse than the first Eurozone Crisis.
The Euro may be a revolutionary idea but it is an idea that belongs in the dustbin of history, at least in its current form. Having countries control their own fiscal policy without controlling their own monetary policy proved to be a great blunder. Unfortunately, any fix for this issue will require either economic or political sacrifice. Either nations should have moved away from Euro after the Eurozone crisis or the EU needs to act as the United States of Europe. The latter will lead a transition of power from democratically elected national governments to international bodies that, at best, have a democratic deficit or, at worst, undemocratic in nature (Hickmann and Schult 2012). The former may cause short-term economic pain and may cause the European technocrats to fail at their goals, but will likely to lead long-term economic gain and cause the European technocrats to fail at their goals.
When the next recession happens is a mystery. But in economics, there will always be a next recession. When it does happen, it may lead to disaster for the European economies, not to mention the world. It will also force the political elite in these nations to choose between democratic, national governments or the European Idea. Whatever they may choose will have repercussions for generations.
