The Euro is sowing the seeds for the next European war

When the euro was adopted, cash was still a big thing. Economists hailed the savings in transaction costs that would come from Europe having a single currency.

At that stage, we had not had the GFC. The currency union did not cause the GFC, but it sure made recovering from it tough. When the global economy is foundering, the importance of having an independent currency and an independent monetary policy is suddenly very clear.

Now we see what happens if your economy is screwed but your currency and monetary policies are made far away.

Europe unemployment map

 

Some countries get a free ride and others suffer.

The problem is especially acute for those under 25.

youth unemployment graph

This is how Europe is poisoning itself. All those young southern europeans – 23 years old and no job – are seeing their human capital withering on the vine. Among them are growing numbers who will vote for extremist parties in a decade’s time, because the promise society made to them has not been kept.

If you don’t get a job early on, you can be stuck without one for a long time, and then channeled into low-value work.

Here’s what the IMF says about youth unemployment:

“Unemployment can exact a big personal toll on young people. Failure to find a first job or keep it for long can have damaging long-term consequences on their lives and career prospects. But youth unemployment also has broader social consequences and contributes significantly to growing income inequality in advanced economies.”

Economic problems are worst in Greece, Portugal, Italy and Spain. Luckily these are not the countries with the biggest populations, nor the strongest warring traditions. But they are not without their flash-points.

I’m not predicting a world war. But separatist movements and terrorism are on Europe’s doorstep and remain very possible within its borders.

Terrorism has already struck Spain, in Madrid in 2004. Spain also contends with two separatist regions – Basque and Catalonia.

Greece has Golden Dawn, a party somewhere between far right and neo-nazi, which got 7 per cent of the vote in 2012 elections, putting 18 representatives into Greece’s Parliament. IN 2014 it won 9.4 per cent of the vote in European Parliament elections.

Even Italy has a major political party that wants to split the country in half – Lega Nord.

These movements won’t need much encouragement to blame Germany for their plight while it enjoys rapid growth and very low unemployment.

What the countries of Southern Europe need desperately is the kind of quick shot in the arm that can come from rapid exchange rate devaluation. Then, independent monetary policies that can help them get back to growth in their own time. And they are not going to get that in the Euro.

The national debts of these countries will appreciate as their currencies fall. The inevitable need to restructure that debt is the major sticking point for letting these countries go. But paying the debt down while the countries remain inside the strangling embrace of currency union also seems unlikely. If the issue is left too long, radical politicians may take power for whom debt default is minimo.

For the good of the future of Europe, we need to bring back the Peseta, the Drachma and the Lira.

(For a deeper discussion of debt and the issues of the euro, I recommend reading this post at the blog of Michael Pettis)

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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