On Sunday on the World Service Evan Davies had a guest who was discussing the Euro. The guest, a prominent and frequent commentator on the business media was opining about the Euro and gave his opinion that you could not have a single currency without having political union – being the same country was how he put it.
This is a common view. If it was so obvious however why was it that so many experts at the time in Germany and other parts of Europe did not see it. There were many in the UK who said the same thing at the time but when questioned rigorously it was clear that their objections were not soundly based. They were based upon the view that since we won the war we should be leading any European venture not being just one of the members. The Euro was not the first experiment in a single currency. The Sterling area was its predecessor and there was no political union, nor was there any convergence of economies – another argument of the British Euro skeptics. There certainly was no fiscal union. Indeed many countries in the Euro area did not have an income tax system. The difference of course was that we ran it.
Of course the so called Euro crisis is a debt crisis. If Greece, Italy Spain and indeed others had not been in such a situation we would not be having this discussion. Greece just happens to be in a particularly bad debt situation. It could easily have been us. But how did Greece come to be in this position. Only because some foolish British and other banks treated Greece as if it was the same credit as Germany. Why did they make this foolish mistake. They did so because they assumed, rather foolishly, that since Greece was a member of the same club as Germany it was of the same credit standing as Germany.
The suggestion of the Euro skeptic experts is that if Greece had been not just a member of the same club as Germany but one of the German states the foolish banks would not have made that mistake.
Personally I think that they would have been even more likely to make that mistake and would have lent Greece even more money than they did since the relationship would have been closer.
The banks foolishly assumed that being a member of the same club means that the other members will come to the aid of one who was insolvent. That is really quite silly. It would be equally silly if Greece was a German state. Otherwise there would not be different credit ratings for states in Germany. Nor would the states in the US have different credit ratings than the Federal government.
The mistake that is made by the critics is one of reverse logic. They see that most countries that are politically united have the same currency. They therefore assume that if you have the same currency you must be in the same country. That is illogical.
Nevertheless this reverse logic seems to be gaining strength. If experts aay something often enough it will be accepted by the public.
Many confuse the cure with the cause. The cure to the Greek crisis may indeed be to cause inflation or devaluation – two rather destructive economic policies if they can be called policies. That does not mean that the Euro causes excessive borrowing. It does not. Only foolish and greedy bankers cause too much borrowing – with the collaboration of the borrowers of course.
It is true that Greece itself thought that being part of Europe meant that it was entitled to the same living standards as if by magic. They priced their goods and services as if they were the same credit standing as Germany. If the cure is for them to reduce their prices they can reduce them in Euros. There is no need to devalue through changing the currency. There is no get out of jail card without pain. When one is insolvent the medicine is and has always been the same. The lender loses his money, will not repeat the same mistake and the borrower has to live within his means.
The Greeks do not want to live within their means. Leaving the Euro will force them to do so. That is the only reason for them leaving.
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