What Mainstream Economists Aren't Telling You: The Euro Is Not in Trouble--But the People of Europe Are
One of the phrases frequently written in economic circles in the United States (and to a lesser degree in Europe) is “the Euro is going to collapse.” Those who repeat that phrase over and over again do not seem to know how the Euro was established, by whom, and for whose benefit. If they knew the history of the Euro, they would have noticed that the major forces behind the Euro have done very well and continue to do so. As long as they continue to benefit from the Euro’s existence, the Euro will continue to exist.
Let’s start with the Euro’s history and the major reason it was established. After the collapse of the Berlin Wall, it looked like East and West Germany could reunite and as the Western German establishment wantedbecome, once again, a united Germany. That possibility did not please democratic Europe. Twice in the 20th century, the majority of European countries had to go to war to stop the expansionist aims of a united Germany. The European governments were not pleased to see post-Nazi Germany reunited. President François Mitterrand of France even said ironically that, “I love Germany so much that I prefer to see two Germanys rather than one.”
The only alternative these governments saw was to make sure the united Germany would not become an isolated country in front of everyone else. Germany had to become integrated into Europe. It had to become Europeanized. Mitterrand thought one way of doing this was to have the German currency, the mark, be replaced by a new European currency, the Euro. This was thought to be a way of anchoring post-Nazi Germany to democratic Europe.
The German establishment, however, put forth conditions. One was to establish a financial authority, the European Central Bank (ECB), that would manage the Euro and have as its only objective to keep inflation down. The ECB would be under the heavy influence of (i.e., controlled by) the German Central Bank, the Bundenbank. The other condition was to establish the Stability Pact, which would impose financial discipline on member states of the Eurozone. Their public deficits would have to remain lower than 3% of their GDP, even in moments of recession.
To understand why the other countries accepted these conditions, one has to understand that neoliberalism (which started with President Ronald Reagan in the United States and with Prime Minister Margaret Thatcher in the United Kingdom) was the dominant ideology in those countries. A major position within that neoliberal dogma was to reduce the role of the states as much as possible, encouraging private financing and de-emphasizing domestic demand as the way of stimulating the economy. In this view, the main motor of the economy should be the growth of exports. These are the roots of the problemnot of the Euro, which is in good healthbut of the welfare and well-being of the population in those countries.
The European Central Bank is not a central bank
What a central bank does, among other things, is to print money and, with that money, buy public bonds of the state, making sure the interest rates on those bonds are reasonable and do not become excessive. (The U.S. Federal Reserve, for example, has created more than $2.3 trillion since 2008 and used it to buy U.S. government bonds and mortgage-backed securities). The central bank protects states against the financial market’s speculation. The ECB, however, does not do this. The interest rates on the states’ public debt in some countries has skyrocketed because the ECB has not bought any of their debt for quite some time. Spain and Italy are fully aware of this.
What the ECB does, however, is to lend a lot of money to private banks at a very low interest rate (lower than 1%), with which they buy public bonds with very high interest (6% to 7% in Italy and Spain). It is a fantastic deal for these banks! Since last December, the ECB has lent more than 1 trillion Euros (1,000,000 million Euros) to private banks, half of it (500,000 million Euros) to Spanish and Italian banks. This transfer of public funds (the ECB is a public institution) to the private financial sector is justified by indicating that this aid was needed in order to save the banks and, thus, ensure credit is being offered to small and medium-sized business enterprises and families in debt. Credit, however, has not appeared. Both individuals and businesses continue to have difficulties obtaining it.
Occasionally, the ECB buys public bonds in the secondary markets from states that are in trouble, but it buys them in an almost clandestine way, in very small doses and for very short periods of time. The financial markets are aware of this situation. This is why the high interest of the public bonds goes down for a while when the ECB buys them and then goes up again, making it very difficult for states to sustain them. The ECB should announce openly that it will not allow the interest of the public bonds to go over a certain level, making it impossible for financial markets to speculate with them. But the ECB does not do this, leaving the states unprotected in front of those financial markets.