Crises Du Jour

    The Eurozone is a manifestly inequitable system which Italy and other adversely-affected members have a moral imperative to exit, as it has proven utterly resistant to reform. Countless attempts to justify its flawed one-size-fits-all theory have been made over the years, but the sad reality is that the politically-driven scheme has had the malign effect of vastly enriching a handful of historically-wealthy states while devastating the economies of others. The remedy prescribed by the very same sophist minds that created that system - enforced "austerity" for generations to come - is economic, social, and political poison. The only path to economic health for the "other" countries is a return to their sovereign currencies.


    Shackling one's country to an austerity program like that which the Greek government disgracefully accepted is not only senseless, it is immoral. Doing so sentences generations of future citizens to pay for debts they did not incur, on terms they had no ability to negotiate. Austerity theory imposes lower standards of living on all subject countries and makes them debt-serfs to unaccountable global "investors" who readily flash the feared sword of bond-market mayhem whenever any courageous leader dares even suggest seeking a better way. 


    The Eurozone's fundamental defect is as glaring as it is undeniable: any chosen area-wide interest rate helps some countries and hurts others. Members' economic performances vary tremendously - from highly competitive Germany at one end, to ever-straggling Greece at the other. The interest rate is established by the European Central Bank. Whether or not one believes that the ECB's decisions are apolitical, history shows that the rate has at all times overwhelmingly benefited the most politically powerful members of the union at the expense of the others. That history additionally indicates that the economic winners will never permit the ECB to raise the rate to anywhere near levels that would enable less-competitive economies to inflate away some their debts and move toward parity.


    Austerity theory outlandishly posits that weak Eurozone performers will eventually become strong if their economies are sufficiently choked by spending restrictions. Its proponents assert that structural inadequacies account for unequal performances among members, and that laggards who suffer long enough will be moved to revise their institutions and practices to mirror those of the economic leaders. That reasoning is patently fallacious in multiple respects, as well as imperious and offensive. 


    After twenty years it is more than evident that the citizens of Italy, Greece, Spain, Portugal, et al., do not want to change their societies and cultures to become like Germans, and there's no economic reason for them to do so. They all were able players in the worldwide game of trade before adopting the Euro, precisely because their adaptable sovereign currencies continually balanced the playing field. Their existing economic structures reflect the collective desires of their voters, and those citizens have the right to refuse outsiders' demands that they revise their structures rather than continue with practices they've found to be suitable and desirable in the past. 


    The ability to devalue a national currency in order to counteract severe external trade imbalances - an elemental attribute of sovereignty - is a vital tool that weaker Eurozone members must reclaim and use before they fall even further behind. Returning to sovereign currencies will enable non-competitive countries to set exchange rates that will deliver immediate, certain growth, no matter how far their present economic structures may be from austerity theorists' ideals. 


    While either devaluation or austerity will reduce citizens' spending power, devaluations don't bankrupt businesses, destroy entire industries, and create socially-devastating unemployment. A currency devaluation reduces an entire country's buying power, but the pain is equitably shared and the medicine actually helps the patient grow stronger. A devaluation increases the price of imports, so domestic alternatives are then sought and developed, and it makes exports relatively cheaper, so demand for the country's domestic goods and services increases. As post-2008 history has universally confirmed, austerity regimens are highly inequitable and the course of such treatments permanently destroys families, social cohesion, and governments. 


    Any country withdrawing from the Eurozone would in effect be declaring bankruptcy at the same time, as it would necessarily assert the right to repay some or all of debts in its sovereign currency. Accordingly, reversions to sovereign currencies will impose massive losses upon those countries' creditors. While that consequence is highly undesirable, it can't be avoided, and it is substantively the same as that faced by creditors worldwide in the countless corporate and individual bankruptcies that are declared every day.


    There is no point in attempting to assess blame. It makes no difference whether weak countries got themselves into their present positions because they're lazy and profligate, or avaricious creditors created their problems by encouraging foolhardy governments to borrow more money than they could ever repay, in the mistaken belief that Germany would ultimately backstop all debts. Debtors' prisons no longer exist in the western world, and debtors are entitled to declare bankruptcy, discharge debts, and start anew no matter what their culpability may be. Likewise, the myopia of Eurozone theorists and the intransigence of its enforcers are now just subjects for future historians to debate. All those factors and more contributed to the dysfunctional status quo, but finger-pointing will not change anything. Only remedial action can solve the problems. 


    The process of reverting to sovereign currencies will be difficult, especially as the resistance from established interests will be great. However, comprehensive planning and implementation will minimize the scope and length of disruptions. The key to avoiding the opposition's primary weapon is this: subject countries should not declare any intention to exit the Eurozone. Rather, they should publicly announce their conclusion that the existing Eurozone system is patently inequitable and unsustainable, then proclaim that: 1) they reject the ridiculous theory that imposing more austerity upon the most troubled economies will somehow enable them to catch up to the strong and continually-advancing economies;  2) they refuse to abide by the existing budget rules that enforce austerity theory and will refuse to pay any sanctions the EU may impose in response; and 3) they demand that the Eurozone make structural reforms to address the past damage to their economies and prevent such damage in the future. 


    All subject countries should repeatedly emphasize, as Italy has already done, that they do not wish to leave the Eurozone, but that its inherent flaws must be corrected. Demanding that the Eurozone itself make structural reforms and attempting to work to achieve them from within will in the first instance generate domestic and international goodwill and support. It will also provide the subject countries with much greater leverage in their dealings with the Eurozone decisionmakers and much more time to prepare for ultimate transitions to sovereign currencies. When the bond markets begin to get nervous, the impact will be felt by all Eurozone members, not just the subject countries. Increasing bond rates will continue to be a shared problem until there are ultimate resolutions or withdrawals, and indeed, thereafter as well. 


    Most importantly, by taking the above steps the subject countries will have given the Eurozone every possible opportunity to reform, and since none of those countries will voluntarily exit, the Eurozone will have to act to force them out. At that point the process of returning to sovereign currencies will be much smoother than what would have followed abrupt announcements of withdrawals from the Eurozone, as governments of the subject countries will have been openly, logically, and prudently making worst-case, return-to-sovereign-currency plans during the entire course of those negotiations. At that time as well, the remaining Eurozone members will have every incentive to smooth the roiling bond market waters in which all of their boats will need to float. 


    As a practical matter Italy should be the first country to take the above actions, since it possesses existential leverage vis-a-vis the Eurozone and the European Union; it clearly already has a "Plan B" in place which includes novel transitional ideas such as the use of "mini-bots" and the sale of some national gold; and its present leaders have demonstrated both acumen and courage with regard to the question of exiting the Eurozone and reverting to the Lira. Under any circumstances a first move by Italy would help all other similarly-situated countries, either by blazing a trail they can follow or by forcing the Eurozone and creditors to offer them profoundly better terms. 


    Needless to say, any country that reinstitutes its sovereign currency, exits the Eurozone, and disavows existing debt terms will face widespread opposition. Doomsayers will inevitably predict that such countries will never again be able to access world financial markets, but history belies that claim. Germany itself has gone bankrupt multiple times, as have France and other members of the Eurozone, and each of those countries obviously reorganized and prospered thereafter. New lenders always arise, willing to bet that a distressed sovereign which happens to have a just-reduced balance sheet will be sure to repay its new loans before anything else. The circumstantial pressure on such a sovereign actually gives new lenders a much greater sense of security and priority than they would otherwise have.


    The common occurrence of "pre-packaged" bankruptcies is an example of that very phenomenon. New lenders routinely commit to financing a bankrupt company, provided the bankruptcy court reduces or eliminates the claims of prior lenders. When one considers the paucity of current investment opportunities that offer even 2% returns, the vast amount of capital worldwide that is desperately seeking better returns, and the fact that global transactional intermediaries must find and sell new investments in order to make money, the outlook for subject countries is not bleak. A country that could not possibly afford to pay even 5% on new bonds when its debt stood at 131% of its GDP might readily be able to do so once its prior debt is greatly reduced. 


    The promise of prosperity and the political pressure imposed by the EU led Italy and other countries that had unsuitable economic structures to join the Eurozone. It is now indisputable that it was a gross mistake for them to have done so. Participation in that union has significantly damaged their economies, induced them to take on debt that can never be repaid, and forced them to accept payment terms that cannot possibly be sustained. 


    Perversely, the Eurozone scheme weakened its weakest members by removing the one tool that had previously permitted them to compete with the strongest. Moreover, the less creditworthy those countries have become over time, the more global investment money has flowed away from them and toward the perceived safety of government bonds issued by the strongest, an investment trend which continues to weaken the weakest every day. 


    It is incumbent upon the leaders of each of the countries whose economies have deteriorated since they joined the Eurozone to admit reality and take remedial action. There is no reasonable chance that any such country will ever recover economically, let alone grow enough to get ahead of its debts, while remaining subject to the misguided strictures of that union. Austerity theory is nothing but an implausible, pseudo-economic argument made to try to justify ill-advised decisions that put wildly unequal economies in the Eurozone, and to try to prevent embarrassing and disruptive defections. 


© 2019 F. Emmett Fitzpatrick, III. All rights reserved.

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