The MEPs tell us that the economy is an issue that will be of interest to every voter, right across the Union - and they’re right, because it is the problem that everyone will expect Brussels to help fix. There is strength in numbers, and these are some impressive numbers.
Still, there is hardly a common strategy to dealing with the crisis. The UK, already saddled with the highest rate of personal debt in the world, decided to cut taxes and try to promote more spending. Most of the European states are not being quite that cavalier, although almost all of them have been bailing out their large financial and commercial institutions, in an effort to stave off disaster.
Then again, not even the richest nations have billions of Euros lying around; decisive action takes resources. The money that you are pouring into your economy will have to be borrowed. But wasn’t it the massive borrowing that got us all into this mess?
There is an excellent article in Der Spiegel that talks about the possibility of countries going bankrupt. Everyone knows that this happened in Iceland, but let’s face it: Iceland is three hundred thousand people who can’t grow any bread. More worryingly, the article points out that large countries - those that make up the backbone of the EU - very much can go bankrupt; in fact they have before, and it’s increasingly likely that they will again; and soon. What hope do the smaller member states have?
That question has been on a lot of minds in the northeast corner of the Union. Latvia is hanging on for dear life, and in Estonia, politicians are calling on the people to make sacrifices. They’re telling us that the key to long-term stability and prosperity is in joining the Euro; that it should be our new national goal, just as membership in the EU and NATO was before. We could have joined in 2007, but the rapid growth meant we just missed out on the inflation criterium; with the average EU economy in trouble, it’s quite likely that we can get in by 2011. But we’ll need to work hard on it.
When I mentioned this to fellow th!nker Toni Straka, he thought I was mad. Why the hell would we want to join the Euro, with all the trouble it’s in? Indeed, for all the problems of our economy, we’re ahead of the curve in a lot of useful ways. We have almost no public debt to speak of, devaluation of the Estonian kroon is highly unlikely, and since none of our major banks are locally owned, it was the Swedish taxpayer who kept them liquid. As Europe’s big boys compete with the US in the race to borrow - €50 billion by Germany this year alone - so that smaller countries are left with no lenders (according to a quote in the Spiegel article), Estonia is actually cutting its budget. In the last few days, the cabinet has trimmed down 2009 spending by almost ten percent, forsaking pension increases and birth rate stimulation programs, all in the name of getting through the year without a budget deficit.
If we succeed, we may just find ourself in the odd position of our own currency being healthier than the Euro. Germany’s public debt is 62.6% according to the CIA Factbook; France’s is higher. Let’s go back to the Spiegel article for a clue as to what might be in store for a currency when its issuing government borrows too much:
One way to pay down debt, of course, is massive spending cuts and austere savings programs. That, though, is difficult. Much more attractive is the inflation route. The state can just print money and pay its bills. Or the central bank prints money and pumps it into the economy. The currency becomes devalued, but the state doesn’t care because that makes it easier to pay off its debts. (…) Up until now, the process has been subtle. Since the end of the 1990s, the major central banks in the US and Europe have trippled the volume of money in circulation. In recent months, the volume of money in circulation in the US and Europe has increased by almost half.
So, for the eleven member states who still use their own currencies - and especially the more developed ones, whose economies might have some chance of standing on their own without leaning on the European Central Bank - the question is: do we want to join the Euro?
Another fellow th!nker, a Dane, told me his country was extremely EU-friendly. So why hasn’t Denmark joined the Eurozone yet? Maybe they know something we don’t?
I have an answer, but I’d like to hear yours first.
(51 votes, average: 3.69 out of 5)
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As Iceland’s example has shown, for a small country that is successfully integrated into the European and the world economy (Iceland had ranked usually on one of the top5 in all economic rankings lately) keeping an own currency is like toy money. When a countries revenues are in foreign currencies and also it pays the bills in a foreign currency the small local one becomes meaningless and easily fooled around.
Hungary is a manufacturing country without own savings. Its combined export and import is 140% of the GDP. That is simple: we make an income on importing raw stuff and the re-export it assembled. All this, and all our credit is euro denominated. By having a forint, everybody is running such a foreign exchange risk that is almost impossible to hedge.
As the small European countries like Latvia or Hungary deeply integrate into the eurozone, keeping an own currency becomes something like holding chips in a poker game. The euro is the main currency of the European markets.
But doesn’t Estonia effectively use the Euro already? The EEK is hard pegged at a high level. Most loans (both personal and business) are held in Euros. Unless they decouple the EEK from the Euro I don’t see much benefit in holding onto the EEK?
Daniel: Iceland did actually do something useful with its own currency. They had a massive debt culture within, which resulted in the banks attracting capital and paying preposterous interest on deposits (as much as 12% or higher!!!), which in turn brought even more capital to the country, which allowed the banks to use all the extra liquidity to go out and buy up assets all over Europe. Yes, it was unsustainable and lead to the country’s economy imploding, but at the end of the day they had many years of a very high living standard; the current mess has returned them to the state that they would have been in anyway, more or less, had they been more prudent. So having the ISK has still been a net gain for the vikings.
Andres: the idea here is that once we reach the tail end of this crisis - which should be somewhere around 2011 by the reckoning of most talking heads - it could just be the Euro that gets devalued against the EEK. If we maintain strict budgetary discipline and use the downturn to drastically increase the efficiency of labour (which we need to, one way or the other), we might be able to convince the financial world that the EEK is the new Swiss Franc. Then we all have a far easier time repaying our Euro-denominated mortgages.
It sounds very far-fetched, but gets less so when you start realizing just how stupefyingly irresponsible the big Eurozone countries have been.
a “net gain” for Iceland? That’s an interesting thing to say in the light of hundreds of thousands losing close to all of their savings. What exactly is it you are suggesting? Keep your own currency, run an unsustainable borrowing scheme that will eventually result in a major economic crisis, but in the meanwhile, live life to the fullest? I fail to see anything positive in that…
“hundreds of thousands losing close to all of their savings”
What savings? I’ve been to Iceland and talked to Icelanders about it; the entire country pretty much lived in debt. They’d take out loans to buy property, cars and gadgets, then work two or three jobs to make the payments. Icelanders were the longest (though not necessarily hardest) working nation in Europe.
Iceland didn’t cause the crisis. It simply took advantage of the insanity, and now it’s likely that the EU will bail them out. They are a poor precedent to predict the future of any other state, for a number of objective reasons, but I expect that if you asked an Icelander, they would do it again, given the chance.
Why should it just be the hedge fund managers who get something good out of the global greed-fest?
It sounds very far-fetched
Indeed it does, an awful lot would have to happen for the EEK to reach the level of the the CHF, but one can always dream.
I didn’t say that Iceland caused the international financial crisis nor that only Icelanders (?) lost their savings. What I’m referring to is your quote:
“Yes, it was unsustainable and lead to the country’s economy imploding, but at the end of the day they had many years of a very high living standard”
I still don’t see the positive side of this statement, nor do I see the situation as such or the proposterous wins of hedge funds as “something good”.
The positive side is that, in circumstances beyond their control, they used the fact that they had a free-floating national currency to attract massive amounts of foreign capital.
Superb, Andrie. In 1998, Milton Friedman famously warned that the Euro would be seriously tested by Europe’s first major economic recession. Sure enough, we have arrived at that point. Friedman was convinced that it would all end in tears.
I was in trendy Shoreditch eating Turkish pizza on Sun. So some of our economy of consumerism and yuppie excess is still running.
[...] Tuch of AnTyx writes at Th!nk About It: “So, for the eleven member states who still use their own currencies - and [...]
I found a theme song for this blog. And with Jimmy Page on guitar, no less.
I found a theme song for this blog. With Jimmy Page on guitar, no less.
http://www.youtube.com/watch?v=B8nFzryJW18