March 14, 2010

The Euro Has Been a Smashing Success Greeks knew it would be a boon to taverna keepers to share a currency with rich German tourists.

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Even small financial crises like the Greek embarrassment stir up a lot of fuss. Germans are complaining that the 1992 Maastricht Treaty did not have enough teeth to discipline states that broke its rules and that tougher measures are needed. In Athens, the public employee unions are loudly warning their socialist friends against any austerity measures that might cut employee benefits. For comic relief, there’s the U.S. Senate, where Chris Dodd blames Greece’s plight, not on the Greeks themselves but—of course—on “Wall Street.”

Being Greek, the Athens demonstrators aren’t likely to calm down. But everyone else should. The euro bloc is not threatened with collapse. Its members know that the creation of a single currency in 1999 was a truly historic achievement, perhaps the greatest of the 20th century. The euro now serves 329 million Europeans who in recent memory were organized into warring tribes. It has fulfilled the expectations of Nobel laureate economist and euro designer Robert Mundell, who said in 1999 that it would give Europe a world-class currency, second in importance only to the dollar.

Non-Europeans benefited as well. Mr. Mundell forecast that the euro would provide global investors with “another ‘island of price stability’ in addition to the dollar area, in which they can put their capital and use to value their investments.” It surely is not a coincidence that the decade of the euro has also been a decade of remarkably rapid growth in global GDP, a truth that can be attributed to reductions in trade barriers, including currency exchange transaction costs. Europe may have other problems, especially heavy welfare state burdens, but it no longer has currency palpitations of the type it had before the euro.

David Gothard



It’s hard today to imagine the Europe of 20 years ago. Drive in a straight line in any direction from Brussels and in less than an hour you were over someone’s border. If you needed gas or wanted food you had to exchange your Belgian francs for French francs, German marks, or Dutch guilders, paying a commission to a money changer. Exchange rates were in constant flux, which meant that traders had to hedge exchange risks at a cost that also was passed on to consumers. And competition across borders, which was the point of the Common Market from its infancy, was inhibited by the fact that there was no single standard of value.

Had the benefits not been so obvious, the euro would have been a tough sell in a Europe where individuals cherish their national identity. But it not only won voter approval in the 11 original member states, it stirred Greece to take extraordinary measures to gain entry in June 2000. Greeks knew it would be a boon to taverna keepers to share a currency with rich German tourists. The government had to apply some clever window dressing to its accounts, but it’s doubtful that the Germans or French were fooled.

The Maastricht percentage-of-GDP ceilings of 3% on government deficits and 60% on government debt were an effort to bring discipline to states with longstanding and disparate political traditions. Some, like Greece, were notorious for bad fiscal management. German Chancellor Helmut Kohl wanted to levy fines against violators, but it happily occurred to someone that fines would just make the deficits bigger.

Not to worry. A far more powerful enforcement mechanism was inherent in monetary union. Since member states no longer controlled their own currencies, they could no longer inflate their way out of debt, the traditional escape hatch for profligate governments. The European Central Bank was given a single mandate, to maintain the value of the euro. In contrast to Federal Reserve legislation, there was no mumbo jumbo about maintaining full employment, a task beyond the competence of a central bank.

Given these circumstances, Greece’s political class must either face up to the unions or go broke. As monetary analyst Axel Merk blogged this week, “Like most countries, Greece spent a great deal of money before and throughout the financial crisis. Governments have started to realize that financing all this debt costs money—and they are shocked. Stronger countries, like the U.S., are borrowing trillions in the market this year, crowding out access to credit for smaller countries. As of this writing, the U.S. government pays 3.64% to borrow money for 10 years; in the euro zone, Germany 3.11%; France 3.40%; Spain 3.90%; Italy 4.03%; Greece 6.64%.”

Greece is thus a victim of not only its own, but U.S. excesses. Europe wants to help. After all, those Greek Isles are a lovely European playground and no one wants to see Greece fail.

Germany’s Angela Merkel and France’s Nicolas Sarkozy suggest that the right austerity measures could attract aid. The only lever the Greeks have to counter the austerity pressure is to threaten to drop the euro, or in other words, commit suicide.

The euro zone would never miss Greece, which accounts for only 2% of its total GDP, but Greece would sure miss the euro zone. The euro exchange rate for a revived drachma would look very unpalatable to Athenians shopping for German or Italian goods. A return to “Zorba the Greek” living standards would be a prospect. Of course, there’s always the IMF hovering on the sidelines hoping to find a new client, but Germany and France have wisely told the IMF devaluationists to butt out.

It’s hard to ignore the parallel between Greece and three American profligate states, New York, New Jersey and California. They all got themselves into trouble in large part through excessive generosity toward public employees, in America as in Greece a powerful political constituency. The Obama stimulus bill of early 2009, partly a backdoor bailout for over-borrowed states, was less than a success.

The European Central Bank is not trying to inflate the euro bloc out of its troubles and for that it can be commended. The same cannot be said of the Fed, which has proved willing to finance the most profligate nation on the planet, the United States. As last week ended, skies were brighter over Greece. The markets were pleased enough by the austerity package to snap up $6.85 billion in Greek 10-year bonds. The 6.3% coupon no doubt helped as well.

Mr. Melloan, a former columnist and deputy editor of the Journal editorial page, is author of “The Great Money Binge: Spending Our Way to Socialism” (Simon & Schuster, 2009).


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