The great advantage brought by the common currency to Southern European economies that is often pointed up by supporters of the euro is the stability of the currency. It is often overlooked, however, that the impact that the euro and fixed exchange rates in general have had since its introduction was unfavourable. Italian and French economies have turned from net exporters to net importers whereas Spain, Portugal and Greece have amplified the magnitude of their trade deficit.
On the other hand, it is easily demonstrable that the enormous trade surplus that Germany enjoys today, often cited by many1)Why Germany’s trade surplus is bad for the eurozone Source Centre for European reform 2)Germany’s record trade surplus is a bigger threat to euro than Greece Source The Telegraph 2015-05-05, including the European Commission3)German trade surplus could threaten eurozone recovery, says EC Source The Telegraph 2013-11-13, as a threat to European integration, is a direct consequence of the common currency.
In rough numbers, between 1999 and 2007, the year of the financial crisis:
- Germany’s trade surplus quadrupled;
- France and Italy went from an approximately €25-bn surplus to a deficit that was slightly bigger than in the case of the former, and slightly smaller in the case of the latter than the surplus.
- Spain’s trade deficit grew 5 times.
- Portuguese and Greek deficits doubled.
What exactly happened?
The euro is a currency based on the weighted average of the national ones. With its introduction, Southern Europeans saw their purchasing power inflate due to the fact that the euro had a stronger value than their national currencies; the illusion of purchasing power created by the euro led Southern Europeans to import more, but also made their goods more expensive, hence while their economies kept growing, the imports grew significantly faster than the exports.
On the other hand, the price of German goods was weighted down by the weaker (in comparison to the Deutsche Mark) euro, making them more competitive and boosting Germany’s trade surplus.
From 2007 onward the financial crisis and the subsequent austerity policies crippled the purchasing power of Southern Europeans, leading them to import less and thus reducing the deficits, while the exports failed to recover.
Who truly benefited from the euro.
A stable currency is primarily beneficial to multinational corporations that would otherwise sustain additional costs from fluctuating currencies as they operate across borders. Germany’s economic strength historically relies on its big business that thanks to European integration has major transnational operations.
Spain, Italy, Portugal and to a lesser degree France have economies strongly reliant on small-medium enterprises that would instead benefit enormously from exchange rates reflecting the strength or, in this case, weakness of the economy. A weakened currency would make Southern European goods more competitive, giving fresh air to the SME industry. The constraint of the euro, via fixed exchange rates, cripples any chance of recovery.
A Latin-Euro currency to save the EU
Economic recovery is not going to magically manifest itself in Southern Europe as long as people have the illusion of having at their disposal the purchasing power provided by the euro.
Permanent stagnation is not an option for countries with extremely high unemployment like the Southern European ones so much so that the legitimacy and popularity of European integration is losing steam. It matters little that in 2015 Spain had a 3.5% GDP growth because its average in the last decade has been close to zero, very much like that of Italy, France or Portugal.
It is time that the ruling class, the biggest supporter of European integration, realised that to save the EU, the euro needs to go. Or at least to be split to reflect more properly the strength and purchasing power of the various countries.
A proposal could be to let Germany, Austria, the Netherlands and possibly Flanders keep the euro, with France, Italy, Spain, Portugal and Wallonia introducing a Latin-Euro, which at the moment of introduction would enjoy a parity with the current euro and then lose 15-20% of its value, fueling the recovery of the South.
A semi-common currency as opposed to the complete return to national currencies would safeguard the European project, thus meeting halfway the expectations of the the ruling class which strongly opposes the latter.
Nothing would prevent the Latin-Euro from being managed by the ECB either, thus further preserving a degree of political unity.
As for Greece, Greek economy is simply too weak even for a Latin-Euro and would benefit from a return to a much weaker currency
Opposition to the split or the return to national currencies comes mainly out of the ideological bias of the pro-European integration parties. Failing to acknowledge that the euro has done immense damage to Southern European economies will however result in the end of the European Union itself. Further political integration does not solve the problem, it simply ignores it, expecting to build the European house on a weak basis, leading to its inevitable collapse.
While it is understandable that an entire generation of politicians and intellectuals that have worked on the euro as further political and economic integration have an emotional attachment to the “project of their lifetime” and have a hard time admitting it did not work as expected, they will have to choose between the ideological, personal bias and intellectual honesty. Choosing the former might destroy the EU, choosing the latter could save it.
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