Václav Klaus: When will the eurozone collapse?

The editors of the "Ekonom" magazine invited me to answer the question above. I happily accept the offer even though I would probably prefer a somewhat less dramatic title. Even as a long-term critic of the concept of the shared European currency, I see no reason to celebrate that the situation has developed so that similar questions can be formulated at all - especially in such a sharp tone.

First, it's necessary to give at least a working definition of the verb "collapse". It's not as simple as we might think. When I speak about the eurozone, there are at least two interpretations of the word.

In one of them, it seems fair to say that the eurozone project i.e. the project to create a shared European currency has already collapsed a long time ago or - to be more gentle - it failed to bring the effects that were expected from it. The countries that were ready to abandon its national currencies that had been working for decades or centuries were told that the project would bring unquestionable economic advantages. Extensive - and, unfortunately, tendentious and therefore pseudoscientific - studies have been published and they were promising the new currency's contribution to an accelerated economic growth and a lower inflation rate. These studies especially emphasized that the member countries of the eurozone would be protected against unpleasant external economic perturbations - substantially more so than they have been protected in the past.

It's completely self-evident that nothing of the sort has materialized. After the birth of the eurozone, the economic growth of the eurozone has decelerated even in comparison with the previous, unspectacular decades. We have seen a new increase of the gap between this growth rate and the growth rate of other major economic centers such as the U.S., China and other countries of Southeastern Asia, various third-world countries across all continents, but also the Central and Eastern European countries outside the eurozone.

The economic growth in the current member countries of the eurozone has been slowing down since the 1950s and 1960s and the euro hasn't altered this trend in any way. According to the European Central Bank data (ECB Statistics Pocket Book, March 2010), the average annual GDP growth in these countries was 3.4% in the 1970s, 2.4% in the 1980s, 2.2% in the 1990s, and only 1.1% in the "decade of the euro", more precisely between 2001 and 2009. Such dynamics doesn't take place in other regions of the world.

Another expected goal hasn't occurred: the inflation rate of the eurozone hasn't dropped. Two distinct groups of countries have emerged within the eurozone: one of them has a low inflation rate while the other - Greece, Spain, Portugal, Ireland, and a few others - have a higher inflation rate. Long-term imbalances of the trade surpluses and deficits have also increased. The export-dominated countries have been separated from the countries that run trade deficits (it's no coincidence that it's the countries with the highest inflation rate). No homogenization of the eurozone has been achieved by its creation.

The global financial and economic crisis has "only" escalated and unmasked all these problems: it hasn't caused them. It's no surprise for me. "The euro currency zone" of the present 16 European countries is currently not an "optimum currency area", which is what the elementary theorems of the economical theory demand. The fact that the birth of the eurozone was primarily a political decision, which in no way guaranteed that this whole group of countries was appropriate for the project of a shared currency, is repeatedly confirmed (most recently, in Prague in December 2009) even by a former member of the banking committee of the European Central Bank and its main economist Otmar Issing (e.g. in his book "The Birth of the Euro", Cambridge 2008). However, if the currency zone fails to be an optimum currency area, it is inevitable for the expenses to create and maintain the union to exceed the benefits caused by its continuing functioning.

It's no coincidence that I have used the words "creation" and "maintenance". Most economical pundits (and I don't even talk about the non-economical ones) have been satisfied by the ease and a superficially low price of the first step - the creation of the currency zone - and by their attitudes, they have contributed to the impression that everything is just fine. That was an obvious mistake which we - at least some of us - have been pointing out since the very beginning but nobody listened to us. I have never had a reason to question that at the very moment when the eurozone was introduced, the initial exchange rates pretty much (but certainly not 100%) reflected the economic reality that existed at that time. Nevertheless, ten years of the functioning of the eurozone has - completely inevitably - led to the divergence of the economic growth rates in individual countries and to the strengthening grip of the "strait-jacket" of the shared currency that was increasingly crushing the individual member states. When the "good weather" was prevailing (in the economic sense), no visible problem has emerged. However, when a crisis or a "bad weather" arrived, the inhomogeneity of the eurozone has revealed itself more than clearly. In this sense, I would dare to say that the eurozone that used to promise significant economic benefits has failed.

A totally different question is what is more interesting for the laymen (and politicians) rather than the economists, i.e. whether the eurozone will also collapse as an institution and whether the shared currency will be abandoned. My answer to this question is No. So much political capital has been invested to the shared European currency as a gluing element of the increasingly supernational European Union that this currency will certainly not be abolished - at least not in any future that is imaginable for me. It will continue but the price of its survival will be extremely high. It will be paid by the citizens of the eurozone (and, indirectly, some other Europeans as well - those who have kept its own currency). The price will be something that is hard to quantify from an individual perspective - namely the long-term deceleration of the economic growth which will be an obvious economic loss relatively to our growth potential as well as the development in other regions of the globe. Another price will be - a more easily visible - growth of the volume of financial transfers in between the separate eurozone member countries, flowing to the countries with the most serious economic and financial problems. The fact that the currency union is not a smooth sailing without a political union was already known to German chancellor Helmut Kohl in 1991 when he said: "The recent history, and not only the history of Germany, is teaching us that the idea to maintain the economic and currency union without a political union is an erroneous one." Unfortunately, he has slowly and partially forgotten about these words as the time was going by.

The amount of money which will be received by Greece in the foreseeable future may be divided by the population of the countries of the eurozone: each person can easily calculate his or her contribution to the aid to Greece. However, the reduced economic growth rate, which is harder to imagine for an individual, will turn out to be much more painful. Despite this conclusion, I have no doubts that there will be political reasons why this price will continue to be paid and that the citizens of the eurozone will never learn what they have paid in total. In the same way, the citizens of former West Germany will always remain ignorant about the price of the currency union called Germany after the country was re-unified and what the future costs will be because the whole price hasn't yet been paid, not even 20 years after the birth of the German currency union. (I don't want to suggest that the Germans shouldn't have paid this price.)

If I may summarize these arguments, the formal cancellation of the shared European currency is not a real threat. However, the price to preserve it will keep on increasing.

That's why we - the Czech Republic - haven't made any mistake when we decided to stay away from the eurozone so far. In this opinion, we are not alone. On April 13th, the British Financial Times have published an article written by the governor of the Polish Central Bank, Slawomir Skrzypek (I was lucky to have known him well) which was written immediately before his tragic death in the crashed Polish airplane above Smolensk. He literally wrote: "One important reason for this is that, as a non-member of the euro, Poland has been able to profit from flexibility of the zloty exchange rate in a way that has helped growth and lowered the current account deficit without importing inflation." He adds that "The decade-long story of peripheral euro members drastically losing competitiveness has been a salutary lesson." I think that this sentence needs no further clarifications.

Eurozone isn’t going to collapse.

Greece is a mess but the fact that they are talking about kicking it to the curb means they aren’t going to wait for it to kill the whole zone.

There is always the chance of other parts of the EU joining up to replace it.

It could happen of course,mind you,but it would benefit Germany and not Greece.

Luckily for the US, it looks like the Eurozone collapses first, causing a migration of investments to other markets (bonds, commodities, etc.). This will cause a short spike in the US$ and guess who is next? Looks like Bernanke and the cabal in congress and 0 have kicked the can for at least another 1/2-5 years. Then guess what happens?

Yup, US, Japan, Britain and other western economies bite the dust on sovereign debt and mix of hyper-inflation and devaluation and deflation. That leaves China/Asia with a million mouths to feed and no customers.

I personally think we may be getting ready to hit the next Dark Ages but on a global scale.

“Eurozone isn’t going to collapse.”

Germany and other EU countries are the ones bailing out Greece along with the IMF. All the countries, including Germany, have a higher debt to GDP ratio than the US does. That’s like getting a loan from the bum on the corner to pay off the interest on your mortgage payment.

The fact that the currency union is not a smooth sailing without a political union was already known to German chancellor Helmut Kohl in 1991 when he said: “The recent history, and not only the history of Germany, is teaching us that the idea to maintain the economic and currency union without a political union is an erroneous one.” Unfortunately, he has slowly and partially forgotten about these words as the time was going by.

Oh, Kohl hasn’t forgotten about it at all. It is the other way around: The introduction of the Euro is supposed to increase the pressure towards a political union. That is what Kohl wanted!

Nevertheless, excellent article; thanks for posting! Klaus is by far the best politician in Europe.

Bottom line there productivity is falling roughly 1% every decade. According to the trend they will have a 0% increase in productivity in this decade. The Euro like the Dollar is valued based on its inherent productivity. How can the Euro stand this constant drain on productivity while bailing out miscreant country’s? Never thought the Euro would succeed. Ultimately, Germans will cash their Euros in form Pounds and Swiss Francs. When that happens its over.

Vaclav Klaus probably is not going to get invited to the CFR, Bilderburg, Trilateral Commission, WTO, EU, Communist International, or any other Globalist meetings in the near future....

Of course, Klaus makes a lot of sense.

You are welcome.

I enjoy Klaus. He’s a classic, rational old school liberal.

I’d like to give credit to Luboš Motl, the translator. I would of linked to his text but it is on Blogger and there is a Free Republic/Blogger posting tiff.

I find the EU, a bit creepy. I don’t like the depth of the bureaucracy and political distance from the citizens.

I don’t like the notion that worker wealth is by various means transferred to non/less workers.

Fundamentally Greece has, or the capacity to have as much, or as little wealth as they want. I don’t see why Northern Europeans must support a financial/political fight amongst the Greeks.

Further, I feel this is a backdoor bailout for, maybe, German and other banks. The money from German workers and business are sent as a ‘bailout’ to Greece, which turns around and pays elite bankers that enjoyed the profits, but don’t want to be left holding the risk. This, seems to be a phenomenon world wide.

"the formal cancellation of the shared European currency is not a real threat. However, the price to preserve it will keep on increasing."

The collective wins out according to Václav Klaus.

"From each comrade according . . . ."

yitbos

Oh, come on, look at all those happy Bund Bank faces! Anyways, what's wrong with being short? John Paulson did well. Soros did well on the UK. Jim Rodgers thinks the Fed is on the way out. Not bad, 100 year run, a bit longer than that other experiment in idealism, the Soviet Union

We can’t have people organically deciding what they want to do, why it would mess up all the centralized planning of the planers plans! Long live the plan! ( Not last years plan, that has been overtaken by ‘events’, but the new, improved, but unreleased plan.)

Is that a yes?

I want to bet you that US GDP will be higher in 3 years than it is today. Yes, no?

I want to bet you that US unemployment will be lower in 3 years than it is today. Yes, no?

I want to bet you that the US price level as measured by the CPI, will be within 10% of its current level 3 years from now. Yes, no?

Come on, doom monger, put up time. Place a bet.

You are heroic.

We have a U6 in the high teens. So if it ‘drops’ to 15, you win? Does that factor 30 million illegals drifting away?

Ditto the GDP. ( Is that adjusted for a trillion a year of stimulus, or factored out? )

How come tax rates, fees, permits, licenses are not included in price levels? Cash for Clunkers, First Time house buyers, near zero from the Fed Reserve...good, government transaction drags of taxes ....bad, unreported

Who gets to measure, and what is the frame work?

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