The end of Funny Money?
The euro, that artificial Funny Money used by 331 million Europeans in17 nations — the 17th, Estonia, joined the euro just this week — was conceived in sin and born in corruption. The New Year brings the prospect that the sins of the European Union’s founding fathers will be visited on its hapless citizens in the form of financial turmoil and fiscal pain.
The original sins at the euro’s conception included stealth, lies, and hypocrisy. That at least was consistent with the creation of “Europe” in the 1950s, when politicians with mixed motives recklessly signed off behind closed doors on whatever was necessary to bring forth the European Economic Community, later optimistically re-baptized as the European Union, a.k.a. “Europe.”
Contrary to the organic, bottom-up growth of a real nation, this was all done top-down with little or no democratic consultation with Europe’s citizens. (The Brussels-based Eurocracy, now occupying gargantuan buildings in the Belgian capital, euphemistically calls this a mere “democratic deficit.”) But the fact that there was no true political union, and even less centralized economic and fiscal authority, did not deter the EU from declaring a phony monetary union in 1991.
The pretense that this was a step to political unity was at best wishful thinking, at worst pure hypocrisy. The unstated reality was France’s goal of using the euro as 1) a weapon against the dollar, and 2) a way to hobble an increasingly powerful Deutsche Mark and soon-to-be reunified Germany before it left France in the dust. Premier Helmut Kohl, like the great majority of Germans, was cool to the idea on both counts. But he reluctantly went along with the euro when President François Mitterrand sweetened the deal with French backing for German reunification and defense guarantees including France’s nuclear weapons.
In the land of Eurofudge, where nothing is quite what it seems, Funny Money’s inevitable corruption began with its official launch in 1999. Membership in the euro zone — 11 countries initially qualified — was supposedly tied to strict budgetary discipline: member countries’ annual deficit was limited to 3 percent, and total debt to 60 percent, of GDP. But in the absence of any real verification, the rules were routinely flouted.
Some southern countries like Greece flagrantly manipulated statistics, cooked the books, and generally faked it. They and others, like Ireland and Spain, took advantage of bountiful money flowing from Brussels. There was also easy credit to go on spending sprees on infrastructure and entitlements. But even in Europe, corruption can only get you so far. When the markets called the euro’s bluff last year, it meant crisis in Euroland.
Today Europe’s sky is dark with chickens coming home to roost. In a defining stress test, all the European Union’s papered-over cracks in its political, financial, and economic structure are showing up. This could be the year when we will learn whether a technocrat’s delight, history’s only example of an artificial currency without a nation-state behind it, can survive.
The Eurocracy’s hastily thrown together $1 trillion emergency rescue fund was enough to bail out debt-ridden Greece and Ireland — so far — but now speculators have bigger game in their sights. That includes Portugal and Spain near term, with Belgium, Italy, and even France as possible targets later on. EU policy makers are bailing furiously at one summit meeting after another, but their financial buckets are small compared with the gush of both sovereign and banking debt. As the Wall Street Journal put it nicely, “Greece found out it can’t pay its creditors, Ireland thought it could but it couldn’t, Portugal and Spain think they can, but they can’t.”
If a member state defaults, it could trigger a Humpty-Dumpty breakup of the euro zone with unpleasant consequences. One result, according to many scare-mongering EU leaders, would be the end of “Europe” as we know it.
French President Nicolas Sarkozy, for one, tried to put the fear of God in his compatriots last week during his traditional New Year’s address to the nation. Warning against thinking the unthinkable — i.e., any possibility of France’s dropping the euro — he threatened that the whole jerry-built EU would come tumbling down if the currency disappeared. “Don’t believe,” he warned in the somber tones usually reserved for declarations of war, “those who suggest that we should leave the euro… The end of the euro would be the end of Europe.” For good measure, he raised the specter that the euro’s disappearance would undo 60 years of European peace and brotherhood.
That the EU has brought peace and love is official Eurodogma. It is also patently false. (Precisely which war has Brussels prevented? As for European brotherhood, try asking the French what they really think of Germans, and vice versa.) It is also obviously untrue that the demise of the euro would mean the end of Europe. In the 19th century there were two European attempts at monetary union, one among Latin countries and another in Scandinavia. Both collapsed. But Europe, at latest report, is still with us.
If not peace and love, what the EU has brought is the habit of obfuscation and flagrant cheating on its own rules. In this case, the new permanent system for rescuing member states unable to pay their debts, the so-called European Stabilization Mechanism, is a clear violation of the 2009 Lisbon Treaty. As the EU’s constitution, the treaty explicitly forbids financial bailouts of member states by each other. Normally, a change this important in the EU’s basic governing document would require a referendum and approval by all 27 member states. But it is being treated officially — and falsely — as a “limited treaty change” that does not require the consent of the citizens.
Admitting that this is a major transgression, France’s finance minister, Christine Lagarde, is unrepentant. “We violated all the rules because we wanted to close ranks and really rescue the euro zone,” she says, momentarily abandoning official Eurospeak. A group of outraged German economists is asking the German Constitutional Court to rule on the legality of such a violation of EU rules.
This European train wreck could be seen coming for miles. The very idea that monetary union could be created out of thin air, without joint fiscal and tax policies or other federal-style control, was nonsense to many conservative observers both in Europe and the United States. For starters, Great Britain was having none of it and opted out of the euro zone (as did Denmark), thanks to Margaret Thatcher. The lady knew instinctively that such a move could only be based on a common culture, history, and traditions, none of which “Europe” had. Her chancellor of the exchequer, Norman Lamont, said at the time, “So long as such a divergence exists, a move to a single currency would represent a massive leap in the dark.”
So too America’s conservative economist Milton Friedman. Winner of the Nobel Prize and advisor to presidents Richard Nixon and Ronald Reagan, Friedman predicted the euro’s demise within a decade — which, given today’s turmoil, makes him look prescient indeed. “The euro,” he said, “has been motivated by politics, not economics. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.”
Most of the EU’s citizens don’t need a PhD in economics to know the euro was a mistake. (One notable exception: it’s a great success with international criminals, who love 500-euro notes, much more convenient for money laundering than $100 bills.) A Europe-wide poll before the current crisis showed that two-thirds of French, Italian, and Spanish citizens, and over one-half of Germans, thought it had had a negative impact on their national economies. Nearly half of German citizens say they would like to drop the euro altogether and return to the mark. Many put their money where their mouth is: today, nine years after the euro became the official EU currency, German mattresses bulge with 13.45 billion D-marks in cash, about $9.3 billion, that they prudently kept at home and never exchanged for euros.
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