Euro Stands – but Europe Falls

By Shlomo Maital




  Where do we stand regarding the euro crisis?  Here is a short update, for the handful of those who are not tired of reading about this ongoing badly-written soap opera.

  *  The euro has survived.  It is now clear the costs of returning to individual national currencies are enormous – even for Greece.  Threatening to do so opened the German purse-strings, but Greece never seriously planned a return to the drachma. 

  *  At $1.31, the euro is far far too strong. It is overvalued.  It should be at par with the dollar. Why is the euro strong? Supply and demand.  Somebody is buying euros.  Who?  It is not the European Central Bank.  It could be coming from Asia.  It could be sovereign wealth funds diversifying out of dollars.   When China’s currency is vastly undervalued, and Europe’s euro is overvalued – what hope do nations like Spain or even Britain have to export to China?  Only Germany’s powerful brands (Audi, Mercedes, Siemens, etc.) can overcome the powerful euro.

  * The strong euro is in part because of Germany’s success in exporting to China.  This has helped Germany’s economy but hurt the rest of Europe’s.  France and Germany, once strong allies, are now enemies (forget Merkozy!).   Germany’s selfish approach has done major and permanent damage to European union.

  * The euro survived. But Europe – if by that we mean a federation of states with common policies – has not.  Forget about the United States of Europe, like the U.S.A.  There will now be major retreat from common constitution and laws;  for example, countries like France will take measures to restrict immigration, and even the Shengen treaty will be weakened.   Jean Monnet’s vision will be abruptly curtailed.

  *  Europe will continue to lurch from crisis to crisis.  Today it is Spain. Some 200 b. euros may be needed to bail out Spain, because of people defaulting on mortgages. That is over double the 70 b. euros used to bail out Ireland.   Europe is now recognizing that ‘austerity’ will not restore growth.  That was obvious two years ago.  But Germany still believes in austerity. And Germany has the money. So there is deadlock.

     Britain has now slid back into recession – and it is not hampered by the euro millstone around its neck.  Even Germany’s economy will grow by less than 1 per cent this year.   Only investment, re-investment, and innovation will restore European growth. But who is even thinking of such arcane ideas right now?