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Three Eurozones are better than one

There is no denying the reality: Eurozone countries are so different that there will be no common exit to the current crisis. The solution, argues a Dutch economist, is to divide states using the single currency into three groups governed by different rules.

Published on 16 September 2011 at 13:58

When the euro was introduced, one of the main objectives was the convergence of participating member state economies. It was assumed that if a member state failed to keep up economically, it would be excluded by its more competitive peers.

This is exactly what has happened with a number of countries in Southern Europe, including Greece and Portugal. In both of these countries, productivity is too low, labour costs are too high, exports are insufficient and there are too many imports. Worse still, the public finances of these countries are in a terrible state, partly for the reasons mentioned above, but also because of a lack of ethics in public administration.

For more than a year, European politicians have striven to provide these countries, and in particular Greece, with fresh resources to finance their budget deficits. At the same time, the idea that transfers via the European Financial Stability Facility from rich Eurozone countries to their weaker peers does not constitute a long-term solution has increasingly taken hold.

A deep cut in Greek salaries is impossible

The first necessary improvement will be to reduce the cost of the products of these countries, so as to make them more attractive to buyers in more solid economies like Germany, Austria and the Netherlands (GAN). The euro is clearly an obstacle to any such initiative. If the countries in difficulty had their own currency, a simple devaluation would have this effect. However, with the euro, the only way to cut production costs is to reduce salaries.

Let’s imagine that the Greeks accept to cut their salaries by 20 %. How is such a measure supposed to be implemented? It is relatively easy to cut civil service salaries, but that is as far as it goes. Another inconvenient aspect of this remedy is its potential to disrupt the labour market, because a cut in salaries will necessarily reduce the quality of the available workforce. And this will be counterproductive because the functioning of the Greek labour market has to be improved so that the country can successfully compete with GAN countries.

‘Seuro’ countries would benefit from reduced debt

At the end of the day, the solution is to dismantle the Eurozone. Instead of the euro, we should have three currencies: the neuro, the meuro and the seuro. The seuro would be introduced in countries like Greece and Portugal and the neuro in the GAN countries and other similar economies. The meuro would be introduced in countries that have yet to prove that they are really able to belong to the euro: for example, Ireland, France and Spain. Membership of the seuro would be voluntary, and the incentive for countries which adopt it would be that their public debt would be partially reduced. Membership of the neuro would be conditional on the observance of strict rules governing the administration of public spending, labour markets and payment balances.

Will the breakup of the euro trigger “the mother of all financial crises,” as the American economist Barry Eichengreen and a multitude of mostly left-wing Dutch politicians would have us believe? The crisis will be triggered, they say, because account holders fearful of seeing their euros transformed into seuros, which would be worth less, would rush to the bank to withdraw their deposits. So we would have a run on the banks, and a banking crisis would inevitably follow.

Van Rompuy is Sarkozy’s and Merkel’s spokesman

To avoid such a crisis, EU President Herman Van Rompuy, will have to organise a secret meeting of the European Council next Friday. On Friday night, limits will be imposed on the movement of capital between Eurozone countries and an agreement will be negotiated on the division of the Eurozone into three new zones. On Saturday morning, the ECB will begin to print neuros, meuros and seuros and on Sunday morning a fleet of armored trucks will leave to distribute the new banknotes to cash machines in time for Monday morning…

But I must be dreaming, because the EU does not really have a president. Herman Van Rompuy is simply a spokesman for Merkel and Sarkozy, and they are both determined to keep the euro family together, no matter what the cost. So the on-running nightmare of having to take Euro crisis management decisions in the framework of the EU is set to continue.

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