Author: Dirk Müller
_Dirk Müller_
Reading time: 21 minutes
Synopsis
Showdown (2013) is about the current Euro crisis. This crisis makes weaker countries in the European Union unstable. In these Blinks, you will learn why the common currency is in danger of failing. You will also find out who benefits from its failure. And you will see what economic steps European governments can take to stop the crisis.
What’s in it for you: Understand the Euro Crisis.
European unity is a great achievement in history. Europe was a continent where many bitter wars happened for most of its history. Now, the European Union gives half a billion people a life in peace. Its workers’ high output keeps it a leader in the global economy.
But the group of countries made a key mistake, writes stock market expert Dirk Müller in his book Showdown: they brought in the Euro. The common currency was doomed to fail from the start. In these Blinks, you will learn that the currency union made a political dream come true. But it lacked economic sense. You will also find out how much the Euro hurts weaker EU countries like Greece. And you will see why strict saving policies only make their problems worse.
In these Blinks, you will also learn:
- why making a country’s money worth less can help its economy,
- why the USA wants the Euro to fail, and
- that a currency union in Europe was ended before.
Blink 1 – The Euro was more about politics than money from the start.
The Euro crisis was predictable from the beginning. But the common currency was not brought in for economic reasons. It was mainly for political reasons, without thinking about the economic effects.
Let’s look back at history: The Cold War ended in 1989. This made German unity possible. Neither the Soviet Union nor the USA had any objections. The US saw a chance to make NATO stronger and extend their influence to the East. Even those who doubted in Great Britain were convinced. And the French wanted a united Germany to be a strong part of a united Europe.
This was good for Helmut Kohl. The German Chancellor at that time was a strong supporter of Europe. He hoped for a real European Union with a common foreign and financial policy. But this was too much for the French. They wanted a common currency. But they did not want to give up political power to Europe.
From an economic point of view, there were problems with this plan. The different countries of Europe were too different in their economic strength. And they still are. This is because of their unequal productivity. For example, a building frame in Spain or Southern France, where it is forty degrees hot in summer, takes longer to build. In the north, most outdoor work is not possible during snowy winter months.
With their own national currencies, countries could balance economic differences. They could make their currency less valuable. This made their products cheaper for others.
If the Euro project had been thought through economically, it would have been clear that it is hard to link countries like Germany, Greece, Portugal, and Spain with one common currency.
So now, it is cheap for Europeans to buy cars and machines from Germany. But imported goods remain expensive because of the weak currency. This includes heating oil and petrol, New Zealand kiwis and apples, and Chinese toys. In countries like Spain, Ireland, and Greece, people’s buying power grew a lot. But exports fell sharply.
Blink 2 – A currency must fit a region’s economic power, or money transfers will be needed.
German unity meant that two regions with different economic strengths got a common currency. The weak East German businesses suffered. This was because they were not competitive due to the strong D-Mark. Their products were too expensive compared to West German ones. With a weak East German Mark, the eastern states would have seen an economic boost.
This does not mean that every region should have its own currency, as that would be too confusing. However, the fact is that money transfers are needed only if economic differences cannot be balanced by making a currency worth less.
In Germany, a system to balance money between its states at least lessens these differences. But such money transfers only work if the same rules apply to everyone. Imagine a person from Baden-Württemberg knew that someone from Saarland retires at fifty and pays only half the taxes. They would no longer be willing to put their money into a common pot.
At a European level, this would mean: Job laws, tax rates, and social systems would need to be similar. Here, too, payments should not go over a certain limit. This makes sure they are acceptable to the people.
Switzerland learned a few years ago what can happen when the value of a currency becomes separate from economic strength. There, the exchange rate of the Swiss Franc to the Euro changed. This was not because of the country’s economic strength. It was because people mistrusted the Euro.
In late 2008 and early 2009, Europeans no longer trusted their own currency. They moved their money into Swiss Francs, and its value rose sharply. Swiss people in the border areas then bought goods in the Euro zone, which was cheaper for them. This, in turn, hurt retail trade in the Alpine country. Its exporters also had problems. Their products, like luxury watches or pocket knives, suddenly became more expensive for Germans and French people. Tourism also got into trouble, as Switzerland became too expensive for other Europeans to visit.
Blink 3 – Strict saving policies make the crisis worse for weak EU countries like Greece.
Europe urgently needs measures to boost the economy. But politicians don’t see this. Quite the opposite: Struggling regions are forced to follow strict saving plans.
This situation happened once before in history, in the Weimar Republic. In 1929, Chancellor Heinrich Brüning saved against the economic crisis. Financial markets should see that Germany was a reliable partner. But this led to a collapse of the German economy. The results were terrible: There was mass unemployment, the middle class became poor, and this opened the way for Adolf Hitler to rise.
Chancellor Gerhard Schröder did better in the early 2000s with Agenda 2010. Until then, the Finance Minister Hans Eichel had saved very strictly. The result: The economy stopped growing, and unemployment rose fast. Schröder changed in time to reforms with measures to help the economy. He invested in infrastructure, such as road building. There was money for training courses aimed at young people, and other education plans. He also gave tax breaks for household help and childcare. The Chancellor even accepted a criticism from Brussels.
Also in the crisis year of 2009, leaders did not repeat the fatal mistakes of the Weimar Republic. Chancellor Angela Merkel invested during the economic crisis. For example, she funded the car scrappage scheme, short-time work, and improvements to infrastructure. These measures helped Germany get through the recession well.
An example for Europe: Many countries on the continent must reform their job market and social systems. These measures should be supported by economic aid packages, as happened in Germany. Only then can the reforms succeed.
But today, countries like Greece and Spain are demanded to save very strictly. Similarities to the situation in the Weimar Republic are already clear. For example, Greece’s economic output is shrinking, while unemployment there is growing. This increases the chance of social unrest. And right-wing populists use the situation to turn the built-up anger towards foreigners.
Blink 4 – The European Union could benefit from different national currencies.
Supporters of the Euro often say that without the common currency, Europe would break apart. This is not true. After all, not all members of the European Union have brought in the Euro. Think of Denmark and Poland. But these countries are not trying to leave the EU. Poland also got through the crisis well without the Euro. And it is doing better economically than some Eurozone countries.
The Euro is also not a guarantee for peace. The European Union received the Nobel Peace Prize, not the common currency.
It is also wrong to assume that Germany’s economy needs the Euro. But German goods are not attractive abroad because of their low price. The country exports high technology. If someone wants to buy a Mercedes, they will not be happy with a Peugeot. German machines are not sold because they are incredibly cheap, but because of their high quality.
Different currencies would even make it easier for Europe to grow together. And they could prevent conflicts. The Euro being the wrong currency for countries like Spain and Greece had dramatic results there. These included street fights and conditions like a civil war.
Also, different currencies allow countries to balance differences in productivity. They can do this by making a national currency stronger or weaker. This is not possible within a single currency system. Instead, money transfers from rich to poor regions are needed. But it is doubtful whether people in the donor countries are willing to do this.
Many claim the opposite, but a currency union can also be ended. This is shown by the Latin Monetary Union, which existed from 1865 to 1914. It included France, Belgium, Italy, and Switzerland. Even Greece was a member of this union from 1868 to 1908.
Like today’s European currency community, this was a currency union where independent states had joined together. A special feature was that it was backed by precious metals. For many years, people did not dare to end it again. Gold and silver coins kept their value in all countries. But the individual members started to give up the gold backing for banknotes and print their own money. So, in fact, two currencies existed until the Latin Monetary Union fell apart.
This approach could also be used today: The Euro could continue to exist. But each country would still issue its own currency.
Blink 5 – Greece’s problems can be solved by leaving the Euro.
For almost 2200 years, the Greek people were ruled by foreign powers and their whims. During this time, the Greeks learned to see the government and state as an enemy. They did not want to pay taxes to it. This led to the bad tax morale still common today. Also, looking at the country’s history explains why Greeks react so strongly to outside interference, especially from Germany recently.
It would be better for Greece to leave the Euro. After its introduction, the Greek economy became weaker. The strong Euro made Greek goods too expensive. German productivity pushed the Euro’s value up even more. But low interest rates meant cheap money was available. Greeks still got cheap money without major reforms, which made their debt rise sharply.
It was different in Turkey: The Turkish Lira lost value then. But Turkey could not get cheap money. So it had to reform its economy. This led to economic success.
Greek tourism and local agriculture, industry, and exports would benefit from their own, weaker Greek currency. The Mediterranean country could export olive oil, wine, feta, ouzo, and perhaps textiles and medicines. This is because the products would be competitive on the world market due to their low prices.
The Euro and the Drachma could exist side by side. Greek civil servants would get their salary in the national currency from now on. And it would be cheap again for foreigners to shop in Greece. Competitive prices would bring an economic boost to the country.
But not everything is good about this idea: Old accounts and debts in Greece would still be in Euros. This would create a big problem for indebted homeowners, for example. They would receive their rent in Drachmas but have to pay their home loan in Euros. Wealthy people who have assets and thus Euros would be the winners. They could buy much more with their money in Greece than before. For example, they could buy the houses of the indebted owners.
Blink 6 – The USA has a strong interest in the Greece crisis and the Euro’s failure.
The USA wants to stop the Euro from becoming the main global currency. There are two reasons: They have a security interest in it. And their economic survival depends on keeping the Dollar as the main currency.
In 2007, it almost happened. The Euro was about to replace the Dollar as the main currency. Events that were planned by the USA to make Greece unstable happened around this time.
Back then, there were fears that Kostas Karamanlis, the Greek Prime Minister, was negotiating with Russia. He was discussing getting oil and gas reserves, which are believed to be huge in the Mediterranean Sea. Using them could allow Greece to solve all its financial problems. Studies suggest that Europe could cover its needs for decades with the gas reserves around Greece. But US companies are also interested in these resources. So, the US is secretly preparing Greece’s path to bankruptcy. They want to secure the raw materials in the Eastern Mediterranean.
In 2007, the Russian secret service had information about supposed attacks planned against Karamanlis by a Western secret service. The goal was to end Greece’s current energy policy. Two years before his term ended, he called for early elections. As expected, he lost. His successor, Giorgos Papandreou, was a pro-American head of government.
Just two weeks after the election in October 2010, his finance minister revealed that the Greek deficit in 2009 was much higher than the previous government had stated. This forced Greece under the bailout fund. In January 2013, the Greek state prosecutor filed charges against the chief statistician at the time. He supposedly presented Greece’s situation too negatively. Before he started his job at the Athens statistics office after the change of government, he had worked for 21 years at the American-dominated International Monetary Fund.
It is likely that the USA is waiting for Greece to leave the EU. Then, they want to exploit Greece’s natural resources. The International Monetary Fund is also used to reach this goal. They do this by giving the Greeks very strict saving rules.
Blink 7 – Europe has too much debt, and people with low incomes suffer the most.
Money is created when loans are taken out. All debts in the world are equal to the amount of money saved. When countries need money, they take out loans.
The original purpose of lending money was to provide funds upfront. But paying back the money is impossible if the person who receives it refuses to spend it again. This means it does not return to the economy. If someone earns ten million, that is not a problem. They just need to spend the money again.
The problem: Debts and assets are unequally spread. In Germany, private households have almost five trillion Euros in financial assets. And they have over six trillion Euros in material assets, like real estate. Half of Germans together own only about one percent of this wealth. But the richest ten percent of the population own two-thirds. All citizens pay for the interest income of the few. This is because financial assets are matched by debts. The government made many of these debts in the name of its citizens. And they pay the interest with their taxes.
Economic output has grown about eight times since 1950. But debts and financial assets have grown 46 times in the same period. The burden on citizens compared to their income has increased sharply. This is because they all pay the interest for the state’s debts.
A smaller part of the population benefits from how the economy is growing. The bottom half of the population never gets the chance to save money themselves, on which they could one day earn interest. But people have to pay for the interest profit of those who have financial assets. Also, work is taxed more than income from investments.
The gap between debts and assets must get smaller again. To do this, debts must be reduced. This can happen with a debt cut, through tax increases, or through inflation. Inflation means money loses value. This is happening now in Europe, where the European Central Bank is offering money at very low rates.
Blink 8 – Reforms must go hand in hand with investments in infrastructure.
Most European countries urgently need to start reforms. But they only have a chance of success if they are softened by economic packages. These packages create an economic upturn.
A very effective measure is investing in infrastructure. For example, the rise of the USA to an economic world power can be traced back to improving its infrastructure. In the 19th century, railways were successful. In the 1940s and 1950s, a huge network of long-distance roads, called Interstate Highways, spread across the United States. This was like Europe’s motorways.
Europe must take a different path. It is the only continent that has clearly decided to switch its energy supply to renewable energy. So, Europeans should think about investing in energy infrastructure.
Because the energy transition costs money. For example, for building wind farms or researching storage solutions. At the same time, insurance companies are looking for profitable and safe investment options.
But there is a problem. It is called Basel III. This international regulatory rule sets out how much own capital a financial institution must keep for an investment. Investments in industries are seen as risky. So, insurance companies must deposit a lot of their own money for them. But since they have little own capital, they rather invest in safe government bonds.
To solve this problem, a European infrastructure fund needs to be created. Insurers pay money into it. And the countries guarantee the money paid in. The states take a small risk with this. This is because material assets support the guarantees.
Because of the money the infrastructure fund invests, the economy booms. This time, however, it is not borrowed money circulating. No new debts are made.
Insurance companies withdraw their money from government bonds. They sell them to the European Central Bank. The new money is invested, tax revenues flow in, the state buys back the government bonds, and debts fall.
Summary
The main message of these Blinks is:
The Euro is the wrong currency for most European Union member states. This causes big economic problems. Also, EU countries have gathered too much debt. The effects are clear now: The Euro is close to failing. The USA has an interest in this. They want to keep the Dollar as the main global currency. And they want to get raw materials in the Eastern Mediterranean if the Eurozone breaks apart. But Europe can still act against the crisis. By investing in energy infrastructure, the economy can be boosted, and the debt problem can be solved.
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For further reading: The Battle for the Euro by Thomas Piketty
Only a strong Europe can overcome the Euro crisis: Our Blinks on The Battle for the Euro (2015) show this. They outline a way to a united Europe that takes back control over financial markets.
Source: https://www.blinkist.com/https://www.blinkist.com/de/books/showdown-de