Lessons From the Eurozone Crisis

With every month that passes it becomes clearer how little idea anyone has on how to avert disaster in the eurozone. Barring a miracle the Euro will collapse (rumor has it deutsche marks have already been printed and are sitting in Germany somewhere ready for circulation). Europe will have another recession and a second global recession is far from unlikely. Before the common European currency was even introduced, many economists predicted that it was destined for disaster: Milton Friedman gave the Euro ten to fifteen years. Why was this advice not heeded?

Because the Euro was enacted by politicians for political reasons and sensible economics was pushed aside. In 1989, a newly reunited Germany worried many people- after the Berlin Wall fell and Germany was reunited again for the first time since the Second World War, many feared that within a few years it would see if it could be third time lucky at ruling Europe. A common currency, in other words, would stop Germany from potentially starting World War Three.

Currencies in Europe were also a great symbol of national pride and identity just like the Pound remains still is in England. Thus the Euro might instill a sense of European identity into its people, the lack of which was and still is blamed for many of the European Union’s problems.

The Euro had some economic arguments in favor of it, but they were not substantial enough. True, the end of fluctuating exchange rates and currency conversions would make trade and tourism much easier within Europe. Firms would be able to make better and greater investments in the knowledge that their currency would not shoot off in a direction because of speculation, and would not have to spend money working out how to convert their funds into other currencies. The common currency would even aggregate the economic might of all of Europe’s separate countries, and Europe would thus no longer be dependent on the dollar.

These minor economic benefits were completely overshadowed by the fact that individual countries would neither be able to lower interest rates nor devalue their currencies in times of financial difficulty.

In order for any decision to be weighed up successfully, more consideration must be given to the effects of that decision which will matter more. When weighing up whether or not to move to Spain, I should give more weight to the fact that I cannot speak Spanish than the fact that I cannot speak Mandarin. The economic consequences of the Euro were the most important to be taken into account and yet comparatively irrelevant factors determined the decision. Unless the Euro prevented World War Three; maybe we should bear this possibility in mind as we are struggling through the next recession. Somehow, however, I doubt this will be of great comfort to the families who will soon be sending off their unemployment benefit forms for the first time.

Image Courtesy of olivepress