The Euro, Grexit, and yet more wringing of hands

I have long advocated that the Euro should become a parallel currency and not a substitute currency in the various states in Europe.  I have also argued long and hard for a confederation of states in Europe and not a headlong rush toward a Federated Europe, a plan so beloved of the mandarins in Europe.  Opinion pieces as set out below were simply unheard of a while back, but now are becoming more prevalent and I am now interested to understand when we shall see a tipping point away from the current consensus over the EU.  My thoughts are that the negotiations that are gathering momentum as Great Britain sets up its new relationship with the EU could be the catalyst for the tipping point, but it’s still too early to make a definitive prediction.

The Euro Taboo:  The single currency, the beloved offspring of European elites, is largely immune to criticism.

By HANS-OLAF HENKEL 4/6/15, 12:22 PM CET Updated 4/6/15, 4:40 PM CET

The eurozone crisis that has crippled the Continent for the better part of a decade now has all the makings of a Wagnerian opera, in which one tragedy chases the next. The longevity of the crisis and the prevailing denial about its origins among European elites has helped escalate the situation to the magnitude of the Great Depression of the 1930s.

The political consequences of the European Monetary Union’s crucifixion of Southern Europe are now plain: its policies have undermined the achievements of post-war European integration, given new life to radical populist parties, and fueled a surge of anti-NATO sentiment. The prolonging crisis can only increase the ranks of friends of Russian imperialism in Western Europe.

The euro has long been too weak for Germany and too strong for Southern Europe, including France. Instead of facilitating the convergence of European economies, the European Monetary Union (EMU) has only widened the competitiveness gap between member states. In its attempt to restore the competitiveness of Southern Europe’s export industries, trapped in an overvalued currency, the Troika introduced a policy of internal devaluation – also known as competitive austerity – after the 2008 crisis, aimed at wages cuts. The predictable result was mass unemployment and a sharp drop in industrial output, a man-made economic disaster caused by a blind commitment to saving the euro.

And yet, the mainstream European narrative refuses to draw the line between the euro and the collapse of the Greek economy. Instead, the refrain in Brussels highlights the “lack of structural reform,” which cannot by itself explain the scale of Greece’s woes.

Southern European economies desperately need deep currency devaluation, the single most powerful adjustment instrument to cope with serious economic crisis, but that must to be combined with sound economic policy. So long as those countries remain members of the EMU, devaluation is not an option.

The single currency, the beloved offspring of European elites, is largely immune to criticism. It has become taboo to articulate the obvious link between the euro and the economic crisis. Interestingly, this taboo does not exist in the United States, where observers on the right and left, such as Martin Feldstein and Paul Krugman, make this point.

As a result, centrist critics of the euro are being lumped together with right-wing populists such as Marine Le Pen and Nigel Farage. This betrays a sharp disconnect from reality in the mainstream European media.

The natural home for pro-market centrists, people who understand the folly of the euro, is in the European center-right, with its faith in economic liberty and limited government, commitment to the transatlantic partnership, embrace of globalization, and positive vision of a less bureaucratic EU guided by the principle of subsidiarity.

The inability of the European establishment to differentiate between politicians who want a reformed EU, free markets, and no euro, from populists who see nothing of value in the EU, is a symptom of the unhealthy public debate surrounding the euro. Linking the downfall of the EU to the controlled dismantling of the euro takes Europe’s only realistic way of producing conditions for growth off the table.

European leaders insist on continuing to punish Greece with crushing austerity, which pushes the country that invented democracy into the arms of autocratic Kremlin. The dogmatic defense of the euro at all costs endangers the Common Market and stirs more anti-American and anti-NATO feelings than even the most creative Soviet propagandist could have imagined.

The conventional wisdom that fiscal union could fix the eurozone must be rejected. The lessons from Italian history demonstrate that fiscal transfers are unable to help regions suffering from an overvalued currency. Likewise, the European Central Bank’s quantitative easing cannot put an end to the misery in Europe, as it cannot address the problem of misaligned exchange rates within the EMU and its internal imbalances, and instead fuels asset bubbles setting up for a new financial crisis.

Greece needs deep devaluation and a debt write-off. The best economic scenario for a break up of the euro would be the controlled exit of Germany and other competitive countries, but in the absence of political will in Berlin and in other capitals for that scenario, a negotiated Greek exit should be agreed upon.

Only with bipartisan cooperation between centrist European political forces with the political imagination to conceive of an EU without a monetary union, at least in its current form, can we pave the road toward a real European recovery.

Hans-Olaf Henkel is a former CEO of IBM Europe, a former head of the German Federation of Industries (BDI).  He is a member of the European Parliament (AfD) and the Vice-Chair of the European Conservatives and Reformists Group.