The Euro: This Marriage Can't Be Saved

At the time of the euro's launch in January 1999, Milton Friedman declared that the euro would not survive the first major European economic recession. He believed that the member nations would pursue their own fiscal policies, which would be inconsistent with a common monetary standard. The debt crisis in Greece shows just how right he was.

If the Southern European governments comply with "Le Tarpe's" requirement that they move their bloated government budgets toward balance in order to get loans, then their fall in government spending and increased taxes will move their economies into recession. If they don't comply with those conditions, then the effect will be even more pronounced. They will immediately have to balance their budgets, because few lenders will lend money to a government that is about to default.

Beyond causing a deep recession that will push down wages, Le Tarpe does little to address the underlying sources of Southern European debt -- the low savings rates and large trade deficits of these countries. As the following table shows, Greece, Portugal, and Spain displayed large trade deficits in 2008 and 2009, while Germany had trade surpluses. To pay for their imports, Spain, Greece, and Portugal borrowed. Now that the bill is coming due, Greece has no way to pay except through further borrowing.  


           Exports and Imports, selected countries

 
(Billions of U.S. Dollars)

  
      
Country

Year

Exports

Imports

Balance

 
      
Greece

2008

29.1

93.9

-64.8

 
 
2009

21.4

64.3

-42.9

 
      
Portugal

2008

56.4

87.8

-31.4

 
 
2009

41.4

58.8

-17.4

 
      
Spain

2008

285.9

415.5

-129.6

 
 
2009

215.7

293.2

-77.5

 
      
Germany

2008

1498

1232

266

 
 
2009

1121

931

190

 
                Source: CIA, World Fact Book


If they don't want to go through a long recession, the Southern European countries could seek a divorce. They could default on their debts and pull out of the euro zone. Once out, they could let their currencies fall relative to the "mark"! With weaker currencies, they would become inexpensive tourist destinations with cheap labor that would also invite new factories, VWs, Mercedes, et al. They could let exchange rates and government printing presses adjust for their profligacy instead of forcing their workers to adjust directly through deep unemployment and wage concessions.

How the Greek Crisis Hurts the U.S.

Because uncertainty is keeping the euro weak, German goods have become less expensive and American goods more expensive in world markets. Not only will this reduce American exports to Europe, but it will also make German goods more competitive with American goods all over the world. To the extent that China and other mercantilist Asian countries are willing to allow imports at all, those imports will increasingly be European.

Like Greece, the U.S. has a chronic habit of insufficient saving and excessive spending. The euro crisis will exacerbate that problem. Foreign purchases of American goods will probably stagnate, while American purchases of foreign goods will probably increase. The result will be increased layoffs in the United States manufacturing sector and a further decline in investment in American manufacturing production.

The stock markets moved downward over the last month for a good reason. The weak euro threatens U.S. prosperity, especially given the unwillingness of the Obama administration to do anything meaningful to balance trade with China.

The authors maintain a blog at http://www.idealtaxes.com and co-authored the 2008 book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.
At the time of the euro's launch in January 1999, Milton Friedman declared that the euro would not survive the first major European economic recession. He believed that the member nations would pursue their own fiscal policies, which would be inconsistent with a common monetary standard. The debt crisis in Greece shows just how right he was.

If the Southern European governments comply with "Le Tarpe's" requirement that they move their bloated government budgets toward balance in order to get loans, then their fall in government spending and increased taxes will move their economies into recession. If they don't comply with those conditions, then the effect will be even more pronounced. They will immediately have to balance their budgets, because few lenders will lend money to a government that is about to default.

Beyond causing a deep recession that will push down wages, Le Tarpe does little to address the underlying sources of Southern European debt -- the low savings rates and large trade deficits of these countries. As the following table shows, Greece, Portugal, and Spain displayed large trade deficits in 2008 and 2009, while Germany had trade surpluses. To pay for their imports, Spain, Greece, and Portugal borrowed. Now that the bill is coming due, Greece has no way to pay except through further borrowing.  


           Exports and Imports, selected countries

 
(Billions of U.S. Dollars)

  
      
Country

Year

Exports

Imports

Balance

 
      
Greece

2008

29.1

93.9

-64.8

 
 
2009

21.4

64.3

-42.9

 
      
Portugal

2008

56.4

87.8

-31.4

 
 
2009

41.4

58.8

-17.4

 
      
Spain

2008

285.9

415.5

-129.6

 
 
2009

215.7

293.2

-77.5

 
      
Germany

2008

1498

1232

266

 
 
2009

1121

931

190

 
                Source: CIA, World Fact Book


If they don't want to go through a long recession, the Southern European countries could seek a divorce. They could default on their debts and pull out of the euro zone. Once out, they could let their currencies fall relative to the "mark"! With weaker currencies, they would become inexpensive tourist destinations with cheap labor that would also invite new factories, VWs, Mercedes, et al. They could let exchange rates and government printing presses adjust for their profligacy instead of forcing their workers to adjust directly through deep unemployment and wage concessions.

How the Greek Crisis Hurts the U.S.

Because uncertainty is keeping the euro weak, German goods have become less expensive and American goods more expensive in world markets. Not only will this reduce American exports to Europe, but it will also make German goods more competitive with American goods all over the world. To the extent that China and other mercantilist Asian countries are willing to allow imports at all, those imports will increasingly be European.

Like Greece, the U.S. has a chronic habit of insufficient saving and excessive spending. The euro crisis will exacerbate that problem. Foreign purchases of American goods will probably stagnate, while American purchases of foreign goods will probably increase. The result will be increased layoffs in the United States manufacturing sector and a further decline in investment in American manufacturing production.

The stock markets moved downward over the last month for a good reason. The weak euro threatens U.S. prosperity, especially given the unwillingness of the Obama administration to do anything meaningful to balance trade with China.

The authors maintain a blog at http://www.idealtaxes.com and co-authored the 2008 book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.

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