Bernhard Steinruecke: The euro: too good to fail

Last Updated: Sat, Nov 10, 2012 18:40 hrs

On January 1 this year, the euro celebrated its tenth anniversary as a real currency. That should be a reason to celebrate. Instead, it seems as if many people are preparing for a funeral rather than a birthday party.

The euro was launched on January 1, 1999 as a virtual currency, valued at $1.1789. The markets obviously didn’t believe in the euro and it went down to its lowest point of $0.8252 on October 26, 2000. When it was introduced as a real currency, you got only got 88 cents for the euro. But it has bounced back and now hovers around $1.30. Looking at the euro-dollar parity, one wonders where the problem lies.

As for the debt crisis, one has to go back into history. From 2001 to 2008 the average ratio of debt to GDP in the euro zone moved between 54 per cent and 59 per cent (i.e., within the Maastricht limit of 60 per cent), shooting up during the global financial crisis in 2009 to 67 per cent and in 2012 to 80 per cent. Among member-countries, the ratio has shot up frighteningly to 144.9 per cent in Greece, 92.5 per cent in Ireland and 93 per cent in Portugal. But Greece’s debt is just 4.2 per cent of the euro zone’s debt, and the GDP of Greece is only 1.3 per cent of the euro zone’s. To argue that this small country could topple the EU, the largest economy in the world, would be like saying West Bengal, which has about 4 per cent of the debt of the whole of India, could bring down all of India.

Due to the introduction of the euro, Greece has lost its competitiveness; but by re-introducing its old currency and leaving it to fend for itself, no investments will occur and social unrest will be inevitable. Greece needs help, and even the 50 per cent deficit cut will probably not be enough, since the debt in relation to GDP will stay at 120 per cent. Greece needs a sort of Marshall Plan; considering what Germany has invested to rebuild East Germany with its, then, 17 million people, it should be an easy task for a continent with nearly 505 million inhabitants to help 11.3 million Greeks. Germany spent euro 1.6 trillion on reunification and still remains the powerhouse of Europe; the EU, which has almost five times the GDP of Germany, can afford to bail out Greece for a fifth of what Germany spent on reunification. Meanwhile, Ireland in a short time has already managed to stabilise, and even Portugal seems to be under control.

The argument usually is, “who is next?” People look at Italy, which has a high debt-to-GDP ratio of 120.1 per cent, but it cannot be compared to Greece. In Italy, the state may be highly indebted, but the corporate world is not, and individual Italians even less so. In Italy, real estate is mortgaged only up to 8 per cent and, unlike Greece, Italian industry is highly competitive and has an export share as high as German industry, and is bigger than the French. Italian government debt can be easily reduced by just asking the Italians to pay their taxes. In Italy, the number of people declaring an income of more than a million euros a year is said to be less than 800. In Frankfurt alone more people declare that much income.

Even Spain is far from being a bail-out candidate, as it has a debt-to-GDP of 68 per cent. There is strong involvement of Spanish corporates in booming South America, and the Brazilian entity of Bank Santander alone has a market capitalisation that is almost that of the whole of Deutsche Bank.

Meanwhile, everybody is talking about debt and nobody is talking about assets. While Europe has states that are indebted, it also has people who are pretty rich. In Italy, for instance, the debt-to-GDP ratio may be 120 per cent but private net financial assets are 175 per cent of GDP, and that is without counting real estate assets that are hardly indebted. In France the debt-to-GDP is 85 per cent, but net financial assets are 142 per cent, and in Germany the debt is 80 per cent while net financial assets are 127 per cent of GDP. Only in Greece, where the debt of GDP is 160 per cent, are the assets only 55 per cent of GDP — and this is probably because rich Greeks have their money in Switzerland and London. As long as there are more assets than debt, the debt is not a problem.

Therefore, the euro crisis is not a debt crisis but a crisis of trust. And why do we have a trust crisis in Europe? It stems from an incident 11 years ago, on September 11. After this shock for America, liquidity was pumped into the market without considering the risks; with the help of clever investment bankers, America outsourced the risks globally. This bubble had to burst. It seems that America needs a crash every five to ten years, just to let the hot air out of an artificial boom. Be it the savings and loan scandal, the dotcom bubble, the Enron debacle or the sub-prime crisis, it is always the same.

America is moving away from a real economy to a virtual economy, bringing down the share of manufacturing in GDP to a mere 13 per cent, whereas Germany in the middle of the crisis has managed to increase the share of manufacturing to 24 per cent. If things go wrong, America just starts printing money to bail out almost everybody from AIG to Chrysler and GM. In America the debt to GDP has always been higher than in Europe and today stands at 100 per cent. A state like California, on its own the eighth-largest economy in the world and six times the GDP of Greece, is on the verge of bankruptcy.

The euro is much more than a currency, it is the basis of our wealth, the German Chancellor Angela Merkel said. The European countries are now the largest economy in the world. The euro is an integral part of this concept. As with any good merger, one has to make compromises to get market share. So when Greece and Italy were merged into the euro family, everybody knew what they were in for.

One thing is for sure: compared to the US and even the UK (who pretend to be happy not to be part of the euro), the euro zone is in good shape. What Europe needs is a European government, for which it needs capable European leaders. It may not be so much of a surprise if Angela Merkel, admired by almost all for her leadership during the recent euro crisis, gets bored running Germany and takes up the challenge of managing Europe. Prime Minister Manmohan Singh told Ms Merkel that Europeans should be proud of the euro, since they have been able to create a competitor to the dollar. It is only ten years old, he added, give it some time.

The author is director-general of the Indo-German Chamber of Commerce, Mumbai

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