The ongoing global economic crisis is best understood when knowing our monetary history. In particular, the study of the creation of the United States (U.S.) dollar and its comparison with the other major monetary union, that of the euro area, reveal valuable information and offer conclusions about the evolution of the European currency in the future.
The birth of the U.S. dollar
The United States of America began as 13 independent colonies, each with its own currency. Massive inflation and different cultures, customs and traditions among the colonies led to large divergence in the real value of the individual currencies. After the American Revolution and the Declaration of Independence, in 1776, the U.S. decided to establish a central government and chose a central currency that was called Continental Currency. The individual currencies were exchanged against the new currency at different rates and the first unified U.S. currency, the U.S. dollar, was released in 1793.
However, the government quickly recognized that individual States, the old colonies, had to be relieved from the burden of the debt they carried. The new federal government absorbed their debts into a U.S. national debt, thus allowing the States to make a new beginning. By doing so, the federal government guaranteed the consistency of the new country. Additionally, by maintaining control of the new currency, it was able to indirectly control the debt through the mechanisms of devaluation and production of new money.
Comparing the dollar to the Euro
At first sight, one single European currency (the Euro) in a large common market of approximately 500 million people is strong enough to directly compete with the dollar. But monetary theorists and politicians with foresight (Robert Mandel, Helmut Kohl and others) have long warned that without political integration, and hence central fiscal policy, the euro was doomed to fail. The current situation seems to justify their concerns, at least temporarily.
In contrast to the creation of the U.S. dollar, the 17 member states of the Eurozone created a common currency without absorbing the national debts into a common debt. Thus, in just 10 years, inequalities in production and consumption, especially between north and south Europe, led into a deep debt crisis in the Eurozone, which is exacerbated by the ongoing crisis in the global financial markets.
In a global economy that constantly produces deficits it is unlikely that the continued procrastination and failure to take important decisions on both sides of the Atlantic, may sooner or later lead to a major global recession.
Are Eurobonds the solution to the problems of the Eurozone?
To this seemingly simple question there are no easy answers. Different European member states use different approaches. Just note, without further analysis, that we left out of the equation the emerging economies of Asia, India and China, which will likely define the new rules of the global economic game in the years to come.
Many economists already propose a restructuring of the Eurozone debt. This could take the form of consolidation of member states debts by issuing bonds (so called Eurobonds) via the European Central Bank or another central body. The issuing of Eurobonds would mean that Eurozone members would be able to borrow at a uniform interest rate. Southern European countries would have obvious benefits from this development, but Germany and France would have to borrow at higher interest rates, which translates to additional costs in their budgets in the order of double-digit billion Euros a year.
Issuing Eurobonds does not mean anything, if not accompanied by aggressive development policies across the Eurozone and radical reorganization of the banking sector. Apart from a constant flow of public and private investment funds, from north to southern Europe, it is necessary to design and implement a pan-European development program with the help of national governments, the European Investment Bank and the European Central Bank, in a final attempt to revive the troubled economies.
With its entry into the European Common Currency, Greece (and Portugal, Spain and Italy) lost its ability to exercise monetary policy. The question about whether it was right or wrong is purely philosophical. This discussion should have preceded its membership. Nevertheless, within the European Union, fiscal and development policies remain the responsibility of national governments and through them there is still a possibility to control public debts.
Although great sacrifices have already been made to become a member of the Eurozone, Greeks are asked to do even more, even in a direction that seems to be leading nowhere. The Franco-German axis, the “soul” of Europe, seems to be consumed in non-productive “minor effort tactics”, instead of tackling the problems that led to the debt crisis crisis in the Eurozone.
Greece has found itself in the eye of the hurricane. There is no other way out of it but to display willingness and determination to reduce deficits and gradually resolve the chronic structural problems of its economy. However, truth be told, Greeks begin to understand that they do no longer hold the keys of their economy.
- Yannis Varoufakis, Too little, too late, 22.7.2011, http://www.protagon.gr
- Mark Mazaouer, interview in Kathimerini newspaper, Crisis in Greece began in 1980, 17.7.2011, http://news.kathimerini.gr
- Martin A. Armstrong, The coming Greek default, 15.6.2011, http://armstrongeconomics.files.wordpress.com
This is the English version of an article that was posted on 8 May 2011 in the “Neos Agon” newspaper in Karditsa, Greece.