When I wrote The Tragedy of the Euro
I would never had imagined that I would some day write a preface for a
Brazilian edition. I knew that the Euro was destined to fail but I
underestimated the success the book was to have. Today the book is available in
American English, British English, Slovak, Polish, Italian, German, Spanish,
Finnish, European Portuguese, Bulgarian, Romanian, Finnish, Dutch and Greek.
While I write these lines the book is translated into French and Russian.
When you read the book, you may understand
its success. People want to understand what is going on and how a crisis beyond
repair with worldwide consequences could occur in the Eurozone. They fear for
their savings. This crisis, in fact, is today worse than it was when the first
edition of the book was published in December 2010. The fundamental problem of
the Eurozone has not been solved at all. If something has happened the problem
has become worse as more and more public debts have been piled up.
Still, there has been no decision how to
deal with the underlining problem of the Eurozone. Who will pay for the
malinvestments occurred in the past and today represented by piles of public
debts?
In Greece these days the struggle continues about
who will ultimately foot the bill for these investments. During the early 2000s
an expansionary monetary policy lowered interest rates artificially.
Entrepreneurs financed investment projects that only looked profitable due to
the low interest rates but were not sustained by real savings. Housing bubbles
and consumption booms developed in the periphery.
In 2007 the bubbles began to burst. Housing
prices started to stagnate and even to fall. Homeowners and builders started to
default on their loans. As banks had financed and invested into these
malinvestments, they suffered losses. After the collapse of the investment bank
Lehman Brothers interbank lending collapsed and governments intervened. They
bailed out banks and, thereby, assumed the losses of the banking system
resulting from the malinvestments.
As malinvestments were socialized, public debts
soared in the eurozone. Furthermore, tax revenues collapsed due to the crisis.
At the same time, governments started to subsidize industrial sectors and
unemployment.
Moreover, even before the crisis, governments had
accumulated malinvestments due to their excessive welfare spending. Two causes
had incentivized social spending and debt accumulation in the periphery. The
first cause is low interest rates. These low interest rates were caused by an expansionary
monetary policy by the European Central Bank (ECB) and the single currency in
itself. The euro came with an implicit bailout guarantee. Market participants
expected stronger governments to bail out weaker ones in order to save the
political project of the euro if worse came to worst. The interest rates that
the Italian, Spanish, Portuguese, and Greek governments had to pay came down
drastically when these countries were admitted into the euro. The low interest
rates gave these countries leeway for deficit spending.
The second cause is that the euro is a tragedy of
the commons.
In the eurozone, several independent governments
can use one central banking system to finance their deficits. The costs of
these deficits can be partially externalized in the form of higher prices on
foreigners.
Today government debts in several eurozone
countries are so high that they will never be paid back in real terms.
Governments are unable or unwilling to do so. If they increase tax rates, their
economy will collapse and deficits may actually increase. If they reduce
expenditures, there may be social unrest. In either case, they would lose
influence and votes. Because these debts will not be paid back, they represent
malinvestments.
Malinvestments mean that scarce resources of
society have already been squandered; real wealth has been lost by welfare
spending and bailing out bubble industries. But it is still not clear who will
pay the main burden of the losses caused by unsustainable welfare states and
the bailout of industries.
Up to the beginning of the sovereign-debt crisis,
the bill was being paid through the internal monetary redistribution entailed
in the setup of the euro system. Main net contributors were citizens in
fiscally sounder countries such as Germany that were implicitly guaranteeing
for the spending sprees in the periphery. The bailouts of Greece, Ireland, and
Portugal have made these wealth transfers more visible. The incentives of
rescuing irresponsible government are now obvious to everyone. Germans do not
want to pay the peripheral bills anymore. Tensions are rising day by day as
German flags and Merkel dolls with Hitler-beards are burnt on the streets of
Athens.
The question of who
will be paying the bill for the malinvestments has arisen anew with the
official start of sovereign-debt crisis in 2010. A final answer to this
question has not been given. The answer decides the future of the euro, the
future of the European Union, the future of peaceful relations in Europe and
maybe even the monetary future of the world. It is no exaggeration that the
future of the euro will change the face of the world. There exist several
possibilities for this future in theory, which will be fully analyzed in
the last section of the book, where a new chapter is added covering the
development up to date.
Hopefully, this expanded
Brazilian edition contributes toward a broader understanding of the issues at
stake and a radical turn in the dynamics. Despite of being a tragedy, I wish
you an enjoyable read and us all a happy ending.
Philipp
Bagus
Majadahonda
March 6th, 2012
Nota: as visões expressas no artigo não são necessariamente aquelas do Instituto Mises Brasil.
