The EU summit scheduled for December 9 will be judgment day for the eurozone. Dark clouds are gathering over united Europe. After their bilateral meeting, Angela Merkel and Nicolas Sarkozy called for “structural changes” in the eurozone and a new treaty – the contents of which remain a mystery. A little earlier Italian Prime Minister Mario Monti acknowledged that his country will follow in the wake of Greece without a package of anti-crisis measures. Meanwhile, experts are debating what the world will look like after the euro.
H-hour for the euro
The eurozone’s debt problems have become a Gordian knot that EU officials are unable to disentangle. EU leaders prefer simply to cut it.
Apparently, at the Dec. 9 summit in Brussels they will agree that the majority of EU members will switch back to their national currencies before the New Year. Only Germany, France, Belgium and the Netherlands will keep the euro for a transitional period that will tentatively last for three years.
The timing of this fateful decision was well thought out– economic and political life in Europe slows to a crawl around Christmas and the New Year. This lull is the best time for switching back to old currencies and fixing their exchange rates.
Panic was not avoided – the leaks after the Merkel-Sarkozy meeting on December 5 caused explosions on stock and currency markets. If the panic continues, the Old World’s economy will grind to a halt.
The euro we lost
To stop the euro’s slump and the dollar’s growth, trade on currency markets is being suspended and the main exchanges in America, Europe and Asia are being shut down.
The holders of euros and euro-denominated securities are doing all they can to get rid of their dangerous assets. The rates of national currencies and the future of the euro in the countries that will keep it remain unknown.
The panic may result in a run on banks in the eurozone, causing the baking system to collapse. According to leaks in the Western media, eurozone authorities are prepared to freeze all accounts until January 2012.
Experts are all but convinced that Christmas in Europe will be marked by massive riots and protests. But this is not the only problem, or even the main one. Some companies have signed deals in euros and it is unclear what they should do now, especially if these deals are slated for next year. Many experts are surprised that EU officials are in such a rush.
Converting deals to national currencies will require a great deal of time and money. But there is no money, and it will take several years to fix currency rates. The economy simply will not function throughout this period unless a reliable currency appears.
The only candidate is the U.S. dollar. Only the U.S. Federal Reserve will be able to stop this emerging economic collapse by selling huge amounts of dollars.
The euro that wasn’t needed
What was described above is not reality but one of the possible scenarios. This dystopian vision was meant to show how seriously sick Europe is. At the same time, this scenario may still come to pass.
Neither officials nor experts are unanimous on what to do with the knot of European problems. Should they disentangle or cut it? Which is the lesser disaster – abolishing the euro or keeping it?
Some experts believe that the losses from abolishing the euro will be modest, all the more so since the introduction of the common currency has not been very beneficial for the eurozone economies.
Igor Nikolayev, FBK strategic analysis director, said: “Our analysis of macroeconomic indicators shows that the introduction of the euro has not produced any gains. No tangible increase or decrease in the GDP or industrial production has been registered. What is there to regret then?”
Some economists think that the introduction of the euro could not have produced any gains because its main economic goal was to redistribute financial flows in favor of French and German banks and enhance the market positions of German exporters.
Boris Kagarlitsky, director of the Institute of Globalization and Social Movements (IGSO), explains: “Europe’s deindustrialization took place not under Chinese pressure but due to the concentration of almost all industrial production in Germany. Less effective industrial zones proved unable not only to compete with it but even to modernize themselves for future competition.”
He believes that a systemic economic overhaul requires domestic currency and monetary systems and room for flexibility in how countries manage their budgets. Having a common currency makes this impossible.
The euro that was imposed on some countries
Peripheral EU countries like Greece have found themselves in a trap. An expensive currency (euro) is making it hard for them to compete with the developing economies of China and India. Nor can they compete with Germany because of the gap in industrial potential.
Kagarlitsky is convinced that a “smooth transition” from the euro to national currencies would benefit all problematic eurozone countries. Abolishing the euro will cause difficulties in the financial systems of Germany and France and slow down their economic growth but revive other economies that have no opportunities to grow inside the eurozone.
However, all experts polled by RIA Novosti agree that a “smooth transition” is absolutely impossible.
First, the countries concerned would have to destroy the economic contacts they amassed over the past 15 years – numerous euro-denominated debt obligations, shares of European companies and contracts.
Yury Danilov, director of the Stock Market Development Center, believes “the European countries will be simply unable to deal with the euro-denominated arrangements they have made over almost 15 years.”
Abolishing the common currency may aggravate eurozone debts. Vladislav Inozemtsev, director of the Center of Post-Industrial Studies, explains: “The collapse of the euro would cause extreme mistrust in all European currencies and make it much more difficult to sell any debt securities. European companies would find it harder to borrow money.” Mistrust of sovereign European currencies would paralyze the economies of the countries concerned or compel them to look for a currency replacement, for instance, the U.S. dollar.
Nikolayev from FBK thinks that the global economy is teetering on the brink of crisis and that abolishing the euro would inevitably push the world into a new abyss.
The euro that is still needed
Danilov attributes talk of the euro’s early death to the imprecise interpretation of the term “the disintegration of the eurozone.”
“The EU interprets ‘the disintegration of the eurozone’ as the withdrawal of one, two, or, at worst, four countries. These scenarios do not involve the euro’s disappearance as currency,” he explains.
If the eurozone splits and the currencies of its “outcasts” are inevitably devalued, their industries may receive certain competitive advantages. At the same time their budget problems will worsen and the threat of social and political destabilization will become more pronounced. The euro will shoot up, which, Inozemtsev maintains, will reduce the competitiveness of the countries operating in it.
Many experts maintain that the eurozone countries can avoid economic disaster only through collective action.
Inozemtsev offers the following way out: “The only solution is for the European Central Bank to purchase the securities of Greece, Italy, Ireland and Portugal, which must be cleared in the next three years. This will cost 1.2-1.3 trillion euros. If the ECB prints banknotes to redeem these securities, all the problems of European banks will be resolved and the mechanism of inflation put into action.”
Inflation is inevitable – it will stir up the European economy and devalue debt securities to the point that governments will find it very easy to pay them off at their nominal cost in about a decade.
However, experts acknowledged that if the economic problems of the south go unresolved, the crisis is bound to make another round…
The views expressed in this article are the author’s and may not necessarily represent those of RIA Novosti.
