12 juni 2005

The crash of the euro (cleppe)

In its recent issue, The Economist reports about the troubles that the euro is suffering from. Mentioned are the facts that the “Stability and Growth Pact” has been seriously weakened in march 2005, that Portugal has announced that its budget deficit will top 6.8% of GDP this year (more than twice the 3% limit of the Pact) and that the ECB is finally obeying politicians that since the introduction of the euro are insisting on lower interest rates.

The problem with the Stability and Growth Pact was that it imposed the same rules to balance the budget to countries with a high government debt, such as Belgium and Italy, and countries as the Netherlands, that didn’t spoil that much money in the past. Everyone knows that an unbalanced budget is far more damaging in Belgium than in the Netherlands, but as the EU doesn’t really have the legitimacy of a government, it can’t treat countries unequal.

In 1993, with the Treaty of Maastricht, a monetary union was agreed on. This meant that the strong German D-Mark had to disappear. France was tired of having to devaluate its own currency, because it had printed to much money, and spended to much. In exchange for the German unification (a bad thing), the French got a monetary Union.

The Germans needed to have something to make sure that the common currency would be strong. Therefore, stringent rules were agreed on, but of course everybody knew that to bring government debt below 60 % would never happen fast in countries as Belgium, where the debt was 100 % of gdp. In 1997, this was already clear, so then the “Stability and Growth Pact” was agreed on, and this relaxed the rules.

In the end, every country that wanted could enter. Belgium, despite its high government debt. France, because it was its idea. Greece, because there was – proved – corruption.

In several countries the introduction of the euro was a big scale – robbing operation by the government. In the Netherlands and in Italy, for example, the exchange rate has been admitted not to be correct, so people didn’t get enough euros from their government in exhange for their guldens and liras.

In 2001, Ireland, then being the best growing economy in the world, after China, got a reprimand from the European Commission for not obeying to the Pact, as Ireland was planning to disrespect the Pact slightly. When in 2003, France and Germany, did the same, they of course didn’t got a reprimand, which proves the Union is not governed by law, but by power. As a consequence, the Stability Pact was more or less given up.

Monetary expert Paul De Grauwe was always against the Pact, and doesn’t mind that it is been given up. He says, as is generally accepted, that you can not have a monetary union, without having a political union, that can discriminate among countries. No euro without a political Union.

What problem does that pose now, considering the no-votes in France and the Netherlands, founding EU-members? These no-votes caused serious damage to the idea of a political Union (with reason).

The consequence will be that the EU can not refrain memberstates from making high deficits. Only the fact that the creditworthiness of countries is downgraded by rating agencies will refrain them, but that won’t be enough.

The euro will become a weaker, more uncertain, currency.The euro has had some positive consequences, such as the saving of conversion costs, but especially the stringent monetary policy of the ECB, that didn’t listen to politicians, always looking for short term benefits, asking it to lower interest rates.

In the US, the Federal Reserve can already be said being nothing more than a tool for the executive, creating bubbles and a debt-thriving economy. The dollar has seriously weakend and the Americans are living on the merits of the past, when the dollar was strong. The OPEC is already considering to change the reckoning of oil barrel prices in the Chinese currency, the “Renminbi”.

When in Europe, politicians don’t want to cut expenses, the pressure on the ECB will become bigger, and the ECB will have to lower the interest rates. The report of The Economist says this point has been reached. The consequence of that will be an even weaker euro, being a tool for politicians to rob their citizens through inflation.

Inflation is even worse than taxes, as it not only extracts value from the citizens to the government, it moreover makes the value of money uncertain.

There have been signals that the probable new German Chanchellor, Angela Merkel, will blame the euro for Europe’s problems. There have been reports of meetings in Germany to investigate how to withdraw from the euro. Let us hope this will come true.

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