Perish the Euro

By Paul Gottfried

The latest bestseller by German economist Thilo Sarrazin, a former member of the Bundesbank executive board, is a rambling critique of the eurozone. His book Deutschland braucht den Euro nicht (Germany does not need the euro) tells you everything you might want to know about why the eurozone is collapsing.

The countries that formed the eurozone did not show the same monetary restraints or the same willingness to keep state expenditures within 60% of their annual gross national product, as was the practice in Sarrazin’s homeland. Given these circumstances, the only way that the eurozone would have worked is if all its members were integrated into a political as well as monetary union.

Since this did not happen, perhaps contrary to the present German government’s wishes, the signatories of 1992’s Maastricht Treaty gave their countrymen a deadly combination. Sovereign states were free to do with the euro what they wanted without having to submit to enforced monetary discipline. This freedom included raising state and private loans at low interest rates thanks to an originally solid currency.

“What’s inevitable is for the delinquent nations to declare bankruptcy and then return to their national currencies.”

This disastrous monetary union’s worst victims were the “south lands”: Spain, Portugal, Italy, and most egregiously Greece, which reaped disaster with the transition to a unitary currency. All of these countries depended on low production costs in their own currencies to maintain and expand exports. But once they began doing business in the same currency as their northern neighbors, they were at a disadvantage. As production costs have risen, poorer or less efficient countries have shown an increasing imbalance of trade in favor of their richer currency partners.