Keep those souvenirs, kids (Reuters)
The euro is barbarous, but it's not (yet) a relic. Whether it can stop from becoming the latter depends on whether it can stop being the former.
Okay, that's a bit unfair. For all its flaws, the euro is less doomed than it used to be. Foreign borrowing and borrowing costs have both fallen considerably the past year in its troubled countries. Those countries had, with the exception of Italy, depended on big capital inflows during the boom, which then disappeared during the bust. This sudden stop, of course, sent their economies, and with them their budgets, into free fall. But the usual antidote to this -- currency devaluation -- wasn't available. Instead, the euro zone's (healthy) northern bloc bailed out the countries small enough to bail out, and had the European Central Bank (ECB) backstop the ones too big to bail -- all in return for austerity and structural reforms.
It's been enough to end the euro's acute problems, but not its chronic ones. However, even this success looks more like a failure the closer you look. As Gavyn Davies
of The Financial Times
points out, southern Europe has "fixed" its trade imbalances not by restoring competitiveness, but by destroying demand. In other words, the periphery isn't exporting its way to prosperity, but importing less due to perma-slump. As you can see in Davies' chart below, southern Europe still faces a big competitiveness gap with Germany -- a gap that will take years more to close. In the meantime, unemployment is at catastrophic levels, and the mainstream political parties overseeing these ongoing catastrophes are falling into disrepute.
The euro zone is stuck in a 1930s-style crisis because it has a 1930s-style currency. Now, as then, a fixed exchange rate prevents countries from fighting recessions with monetary or fiscal stimulus. Instead, debtor countries have to cut wages and deficits to earn the euros (or back then, gold) they need from exports. But improving competitiveness isn't an easy thing when you can't devalue. Cutting public sector wages doesn't help much, since you can't export government. Rather, austerity acts an anchor to bring down private sector wages too. Of course, bringing down private sector wages is just another way of saying pushing unemployment up. In other words, the road to recovery runs through a deep depression.
How long a road and how deep a depression depends on other countries -- and their customers. But now, as then, creditor countries are making that road longer by flagellating themselves out of fear of nonexistent inflation and dormant bond vigilantes. Indeed, the euro zone's northern bloc pushed the ECB to raise rates in 2011 to counter some short-lived oil-price inflation, and subsequently moved toward austerity
themselves. This contractionary policy has been, well, contractionary -- and robbed the periphery of the export demand it needs. As you can see below, southern European exports within the euro zone, which make up about half of their total, have stagnated since early 2011 -- right after the ECB tightened, as shown by the black lines.
(Note: All data from Eurostat).
The euro was supposed to be a monetary monument to the continent's post-war commitment to comity, but it's been something else entirely: the gold standard minus the shiny metal. It's forced southern Europe to export its way back to health, while ruling out the kind of northern European boom that would make that possible. Unless southern Europe gets a way to grow in the short-run, the euro could very well end up becoming another monetary relic in the long-run.
After all, less doomed is still doomed.