By David T Breaker.
The TV series Arrested Development didn't get many viewers in the UK; come to think of it the US figures weren't much better. The single camera sitcom about a dysfunctional family wasn't a huge hit, but those of us who became addicted to it were left with at least one irritating side effect: the inability to get Swedish rock group Europe's 1986 hit song "The Final Countdown", used frequently in the programme, out of our heads. ("It's the final countdown, da da da dar, ooh…") I thought I had just managed to achieve ridding my brain of this, then suddenly I've found myself humming it without thinking all through last week: subconsciously I guess it seemed the perfect soundtrack to this week's financial news, the band's name Europe an ironic coincidence, as slowly but surely the markets and political class realise that they can bury their heads in the sand no more.
For some of us the crisis in the Eurozone is all too predictable: we Eurosceptics did say it would end like this, or similar, and even though I was still not yet 14 when the Euro appeared in wallets across the Continent even then the notion seemed crazy to me. The Euro enthusiasts simply saw what they wanted to see, discarded and dismissed fears or potential threats, and opted to pin their faith on reality following the best case scenario rather than the most likely. It always seemed quite simple to see that different countries need different policy responses, interest and exchange rates, etc, and a single currency will always mean decisions made for the "average" of all the members, and that may suit nobody, meaning sub-optimum outcomes. A study by the University of Liverpool over a decade ago showed that no single Eurozone nation suited the ECB interest rate, with many such as Germany over 1% out. A rather good cartoon summed it up, with national stereotypes all wearing "One size fits all Europants", which whilst painfully tight on some were baggy on others. (Sadly I cannot find the said cartoon, Google instead inundating me with something called SpongeBob SquarePants, a yellow sponge character of low intelligence who seems better qualified on the Euro crisis than Europe's leaders to be honest.)
In an essay of 2006 which I posted on my first blog I wrote that "lacking the flexibility on interest rates and currency valuation, each Eurozone nation has its own unique problems. To worsen the situation, global changes don’t affect the Eurozone symmetrically; some areas will be hit harder than others. With no national level flexibility, there is no way out. A nation's currency value and interest rates are a safety valve for problems, if control is lost, the results are felt elsewhere; unemployment, inflation or deflation, boom or bust economies, deep lengthy recession and no escape…In times of crisis, such as in Italy now, or Spain where ‘bust’ is predicted, or Greece where inflation is running away, cuts to public spending and services, and/or tax changes, are necessary." It was thinking influenced by the sadly now defunct The Business newspaper, which wrote on 28 May 2006 that "the current account balances of France and Italy continue to worsen. France has gone from a deficit of $8.4bn in 2004 to almost $39bn last year, while Italy’s deficit has worsened from $15bn to $36.5bn. Spain’s deficit is $83bn ($55bn). Germany, by contrast, has seen a strengthening of its current account surplus. If this is convergence, it is not as we know it."
It was obvious then that something had to give, and unfortunately that's left us facing huge losses and an uncertain future. Pegging currencies was always madness, fusing them pretty much irreversibly was certifiable. Europe has now got to face up to reality: without a central authority with complete control, currency unions are doomed to fail. Now they must decide between two paths: either they bite the bullet and form a federal Eurozone state, accepting that this will mean certain policies that are sub-optimum for them at national level; or they choose the path to freedom, admitting the error of the single currency and taking the long but hard road to true recovery. Either way will be hardship; it is now not a matter of avoiding disaster but how best to minimise and recover from it. If they chose federal union then at best they will mimic America, where the US Federal Reserve has to focus on the big wealthy states such as New York and California; the ECB may be forced to do the same, trapping poorer Eurozone states as the EU answer to Kansas or Dakota. If they choose to dismantle the Euro, or for certain nations to leave, they will instead face devaluation and inflation. Either way, they can no longer dodge the issue. For Europe, this is the final countdown. Will things ever be the same again?