The doom and gloom gang is at it again. This time they are buzzing around the corpse of the euro. They go on to explain that the horrible debt of Greece, Portugal, Spain, etc. weighs down the euro. They add that France and Italy are in trouble also, in part because they carry debt from the poorly performing euro nations. The Greek crisis is in fact coming to a head for a second time as a national referendum is planned.
A dire situation indeed! The pundits believe that the euro is already torn asunder and that the euro partners want out. The New York Times has run several articles on the subject, including this note: “the sovereign debt crisis that erupted in Greece [has] produced new fissures within the euro zone, and raised questions about whether the ideal of European integration the euro represented has a future after all” (Times Topics, Oct. 27, 2011). Paul Krugman wrote, “The bitter truth is that it’s looking more and more as if the euro system is doomed.” (October 23, 2011)
Well, in the interests of myth busting, here are six arguments in favor of the euro living on. First, Germany, the real financial engine of Europe, has pledged its support to the euro. In fact, for decades, Germany has been shoring up the European Union and drawing the current euro zone members together in first a loose and now a tighter financial league. Slowly over decades, these nations, once bitterly divided, have formed a union of trade, cooperation and currency. These economic benefits alone should sustain the euro.
A second reason is that Germany has shifted slightly to the right politically. Angela Merkel and her party have been tilting Germany toward fiscal conservatism. This gives Germany even greater capability to hold the euro together.
The first two reasons might be called positive; they show why the euro maintains solid support where it needs it. There are four other reasons in support of the euro. These might be called negative because they show why abandoning the euro would be a dumb idea. The third reason (first of the negatives) is that the euro is a fairly recent European Union, or EU, development. This common currency makes it easier to expand EU markets, increase wealth and move Europe from the old ways in which every country made and sold pretty much everything to themselves. Now they can more easily specialize and open their borders to free trade.
The fourth reason is that the euro bond is as tight as epoxy. Unlike previous times when countries could devalue their own currencies, the euro zone nations cannot opt out, cannot walk away from debt. It may take Germany to bail them out, but the euro bond holds fast. The fifth reason is that the European leaders have been struck with the lightning of economic fear. If they dump the euro, their markets, revenue and national employment will sink rapidly. While the general population may feel the fear on a personal level, the leaders of the nations on the financial edge see the trouble of a failed euro. They will do anything to avoid that fate.
A sixth reason, perhaps an extension of the fifth, is that changing currencies and achieving economic agreement represent monumental achievements. For example, Russia and China have waltzed around for a while talking about creating their own currency and trashing the US dollar (at least Putin has). But so far not much has come of this bold talk. The European leaders realize that if they abandon the euro, it will be decades before any similar efforts at a common currency will be taken seriously by them, by the voters or by the world.
Next month an irritating myth will be exposed. Please comment on this myth and let us know which myths need exposure.
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Michael McTague, Ph.D. is Senior Vice President at Able Global Partners, a financial consulting firm in New York City.
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