A continuation of my previous post: The €uro Roast: What’s Wrong With the Universal Currency Pt. 1
First, let’s take a look at the case of Finland. Matt O’Brien’s article for the World Economic Forum website titled, Why Bad Things Happen to Good Economies provides more support for blaming the Euro for economic instability among member countries. O’Brien identifies that Finland boasts one of the least corrupt governments in the world, in addition to an outstanding educational system and particularly low public debt. Such characteristics should coincide with at the very minimum, a fairly stable economy. O’Brien writes, “Finland is actually stuck in its longest recession in living memory. Why? Well, the short story is the euro.” While it is impossible to claim that the Euro is the only cause of recession in Finland, this case provides an example of how being a member of the Eurozone makes recovering from a period of recession more difficult. In an article for the New York Times Paul Krugman recalls another period of economic recession for Finland during the 1980s. At this time Finland’s national currency was the Finnish markka and according to Krugman, “it was able to engineer a fairly quick recovery in large part by sharply devaluing its currency, making its exports more competitive.” Unfortunately for Finland, devaluing its currency cannot save the current recession because it doesn’t have the ability to do so anymore. Recent economic stability in Finland is rooted in bad luck but the Euro was the catalyst for the nation’s bad recession. O’Brien’s article identifies two major economic problems for Finland in his article: the first being the decline of Nokia (the company made up 4% of the nation’s economy), and the low demand for timber which was one of the nation’s largest exports. In addition, Finland’s largest trading partner Russia has also experienced a prolonged period of economic instability due to sanctions from Western countries and declining oil prices.
All of these factors combined rocked Finland’s economy into recession, which will be more difficult to recover from than previous recessions because of the adoption of the Euro. Obviously, a devalued Finnish currency wouldn’t galvanize consumers to throw out the iPhones and revert back to Nokia smartphones, but it would however make other Finnish exports cheaper thus more competitive in the global market. A devalued or cheaper currency is also beneficial because it leads to an increase in Foreign Direct Investment because exchange rate depreciation increases the overall rate of return to investors. O’Brien explains, “Anytime a shock hits, whether that’s banks failing or an industry dying, the economy needs to cut costs to regain competitiveness. There are only two ways to do that: cut the value of the currency so wages aren’t worth as much, or cut wages themselves.” That being the case, cutting the value of the currency is much less detrimental than cutting the wages of millions of people. Before making important business decisions, board executives and financial experts use the Comparables Method to help guide decision-making. Let’s take this method of looking at comparable company’s before taking on a new project, expansion, or a merger or acquisition, and examine the economy of a nation comparable to Finland, but outside of the Eurozone. Figure 1 from the International Monetary Fund (IMF) website, is a graph displaying Finland and Sweden’s changes in gross domestic product (GDP) since 1989.
This graph clearly exhibits that while Sweden and Finland grew practically identically from 1989-2008. The major discrepancies in their growth appear after 2008, diverging 20% since then. While Finland’s economic bad luck probably would have caused the nation to fall behind Sweden regardless of adopting the Euro, it is undeniable that the Euro has hindered the nation’s ability to proper recover from economic instability. O’Brein also states, “The only way the euro could possibly be worth it is if it helped Finland more before the crash than it’s hurt.” Today Finland’s economy is 5% smaller than it was in 2008 and consequently, claiming the Euro was worth it for Finland’s economy is a case that is hard to make.
The true toxic power of the universal currency can perhaps best be seen in the case of Europe’s largest economy, Germany. In Tim Worstall’s article for Forbes Magazine Paul Krugman is Right Again: It’s the Euro Itself That is the Problem, he explains how the ECB attempted to cleanup after German economic instability. Worstall writes, “When the German economy was pretty sick (around 2000 to 2005) we had low interest rates for all because that’s what the largest economy in Europe needed. This set off massive property booms in both Spain and Ireland.” Binding the 19 Eurozone member countries under one Monetary policy but allowing sovereign fiscal policies, does not allow the ECB to properly help nations recover from economic instability. As previously stated the United States boasts a variety of sub-economies that can be compared to the economies that make up the Eurozone. When global demand is low for Texas’ oil, the United States government has the power to reduce interest rates and lower Federal taxes to alleviate a problem in a certain sector of the economy. In the case of Germany, the ECB attempted to help their largest economy recover by lowering interest rates however, no taxes collected from the boom this set off in other Eurozone nations to put Germany’s economy back on top (like there would be with one central Fiscal policy). In return, the economic booms in Spain and Ireland that resulted from low interest rates eventually turned into a bust. Likewise, once Germany’s economy recovered, the interest rates were further reduced down to zero, and again none of the tax money that resulted was given to Spain and Ireland to ease their economic problems.
Spain’s economic crises also stems from different roots than both Germany and Finland. According to an online article for BBC news, the Spanish government’s borrowing was in fact under control until the 2008 financial crisis and after they adopted the Euro, the country experienced an economic boom and housing bubble made possibly by cheap loans to homebuyers and builders. In the case of Spain it is easy to see that adopting the Euro definitely has benefits in the beginning, but in the long run leads to economic catastrophe. BBC also reports that in Spain, “House prices rose 44% from 2004 to 2008, at the tail end of a housing boom. Since the bubble burst they have fallen by a third” and “The economy, which grew 3.7% per year on average from 1999 to 2007, has shrunk at an annual rate of 1% since then.” Spain is another example leading economists to believe that the Eurozone is particularly prone to economic instability due to their universal currency because, the property boom and burst was catalyzed by inappropriate interest rates of the Euro. While today Spain has recovered from a prolonged period of recession, it is undeniable that its economic stability was worsened by its use of the Euro.
The Economic crisis and potential “Grexit” is probably the most talked about economic crisis in the Eurozone. Similar to crisis in Finland, Spain, and Germany since all of these nations share the same currency – what happens in Greece doesn’t stay in Greece; in fact, it’s become a problem for all Eurozone nations. In an online article the New York Times reports that, “Greece became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures.” This is extremely important in understanding how much fiscal sovereignty is granted to Eurozone nations because while Greece is bound to a monetary policy imposed by the ECB however, their Fiscal policy is in the hands of Greek government officials. Similar to what took place in other Eurozone nations, the government officials responsible for Greece’s fiscal policy created an economic mess and since they are apart of the Eurozone – all of the other nations are involved in the clean up.
Although Greece has received billions of dollars in bailouts from the “troika” which includes the ECB, IMF, and euro member countries; in exchanged for their agreement to austerity measures, Greece still can’t seem to get back on their feet. Since the Eurozone member countries (many of which who have recently come out of recession periods themselves), have helped Greece financially they also believe that they have a say in what happens next for Greece – and in EU fashion, no one can agree. Obviously Greece bit off more than they could chew when it came to borrowing as well as pension obligations, and their inclusion in the Euro back in 2001 has had many consequences. In James A. Kahn’s article for CNBC he articulates that, “the problem is not the fundamental diversity of the [Eurozone] countries, but the fact that each country is fully in control of its own domestic economic policies while not facing the full consequences of their choices.” Since Greece’s recession has spiraled out of control, the solution of the nation’s exit from the Euro still leaves the creditors with their bill. Khan writes, “[a “Grexit”] would set a dangerous precedent for the other “periphery” countries (Spain, Italy, Portugal) that have flirted with insolvency in recent years. The euro is barely 16 years old, and a “Grexit” would jeopardize the union by giving countries an out if they get into trouble.” In reality Greece’s exit from the Euro wouldn’t solve all of the problems their fiscal problems have caused, and in order to move forward a compromise is probably the most realistic solution. A compromise where Greece will be relieved of some of their debt obligations in exchange for drastic economic reforms has proved extremely difficult to reach due to the multitude of opinion on exactly how much reform or how much relieved debt. Since there is clearly a lot at stake for both Greece and its creditors, the Greece economic crisis should blatantly highlight the problems with a universal currency that lacks strict fiscal policy regulations. Without a standardized regulation on fiscal policy along with discipline and enforcement mechanisms, members of the Eurozone will continue to be affected by the problems of other member countries; and the potential benefits of the universal currency will never be realized.
In conclusion, the recent economic instability in Germany, Spain, Greece, and Finland began for distinctly different reasons however; all of these issues were heightened by the shortcomings of a universal currency that includes a standard monetary policy with sovereign fiscal policy. If the Eurozone ever wants to realize the potential benefits of a universal currency, it must address its major underlying issues. With a non-integrated labor market and sovereign fiscal policy across member countries, the Euro this far has solved economic instability in the short-run but has proven detrimental in the long run. The cases of Greece, Spain, Germany, and Finland provide four very different nations that plummeted into recession for four very different reasons, their common denominator being that they are all members of the Eurozone. If the Eurozone wants to prove to the rest of the world that their union is in fact strong and successful in stimulation long-term economic growth and stability as well as play a large role in shaping global economic order, they will need to go back to drawing board and address the other half of the equation that effects the economy; fiscal policy.
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