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8 biggest myths of the eurozone crisis

8th Jun 12 8:24 am

Everyone’s got a view on the Eurocrisis. But before you pontificate make sure you’ve got your facts straight. Here’s a quick guide to the insidious untruths of the eurozone debate

Myth 1: Greece can pull out of the euro

Logistically impossible. The problem arises when the Greek people are asked to switch their euros for New Drachma. They would need to voluntarily exchange euros for a currency which by design would devalue in the days and weeks after launch. So they would refuse. En masse. We can also factor in the sky-high popular support for the euro, the opposition of the governor of the central bank and of all the main parties to reviving the drachma. You can scratch Grexit from your plans.

Myth 2: Austerity got us into this mess

Popular opinion is that government cuts are aggravating falls in aggregate demand causing a recession. Classic Keynsian logic. The problem with this? Every government in the EU is spending more in cash terms than in 2007.

Does this look like austerity?

Source: Veronique de Rugy


Myth 3: Nobody saw it coming

Even the Queen wants to know why we were all caught on the hop. But hang on. Whilst sub-prime sprang a surprise, the euro’s problems were identified yonks ago.

Even at the dawn of the euro there was a queue of economists lining up to point out that the eurozone was not an optimal currency area. The authors of this EU paper examining 170 publications by US economists between 1989 and 2002 was not able to “find any US economist making a strong case for the euro prior to its birth”. Far from it. There was a cacophony of warnings that the eurozone would tear itself apart.*

Opposition to the euro in Britain was spearheaded by Norman Tebbit, George Eustice (campaign manager at Britain for Sterling and then David Cameron’s press secretary), Malcolm Rifkind, Tony Benn and Lord Owen, who said in 1998: “The disadvantages are clear. You are in a straitjacket. You cannot change your exchange rate or interest rates.” Celebrity campaigners against the euro included the author Frederick Forsyth, the actors James and Edward Fox, Jools Holland, comedian Harry Enfield, Sir Ian Botham, and Sir Bob Geldof. William Hague ran his 2001 electoral campaign on an anti-euro ticket.

Special mention must go to John Redwood, author of Just Say No! 100 arguments against the euro. If there is a second edition he might be tempted to rename it, pace Robert Conquest, I told you so you f***ing fools.

Myth 4: Mutual banks are the answer

If only banks were run for their depositors, not greedy shareholders! So says the Labour Party and umpteen Guardian editorials.

Alas, the record of mutuals and not-for-profits is no better.

In the UK the Dunfermline Building Society went under in March 2009. The Barnsley Building Society lost a bundle in the Icelandic banks debacle, and tottered into a merger with the Yorkshire Building Society.

The current wave of bailouts across Europe is focused on mutuals. In Spain the banking sector is dominated by mutual-style not-for-profit cajas (savings bank). The cajas are in a horrific condition. They invested wildly in property developments during the boom and are now dragging the Spanish nation towards a Greek-style meltdown. In May, Moody’s downgraded 16 Spanish banks including Caja Rural de Navarra, Banco Espanol de Credito, Caja de Ahorros y Pensiones de Barcelona, Banco Cooperativo Espanol, Bankinter, Confederacion Espanola de Cajas de Ahorro (CECA), Caja Rural de Granada, Liberbank, and Cajamar Caja Rural. Bankia, formed of an emergency merger of seven cajas, is now asking for 19 billion euros, in addition to the 4.5 billion euros it has already received.

Spain may need to be bailed out to pay for bailing out these not-for-profits.

In France, the Caisse Centrale du Credit Immobilier has just been downgraded. It is owned by local authorities and mutuals.

Nor have small banks fared better than larger institutions. Of the 439 US retail banks which have gone bust since 2008, all but one were lower tier in size. These include the Mutual Bank. The large one which went under? Washington Mutual.

Myth 5: The Greeks need to work as hard as the Germans

Longest hours worked in Europe? Number one on the list are the Greeks. Germany are at the bottom of the list – ranked 33 out of 34 on the OECD ranking. The Greeks work 33 per cent longer hours than the Germans. (The average Greek worked 2109 hours in 2010 to his German counterpart’s 1409 hours). Only South Koreans work longer hours.

Greeks work longer hours than Germans. Fact.

Source: Derek Thompson/ OECD

Greeks work longer hours than Germans. Fact.

Myth 6: Germany has agreed to fiscal union

The Spanish and Greeks are hoping the Germans will underwrite all their future borrowing needs so they can borrow at hugely reduced interest rates. Washington wants the EU to go for it. The Daily Mail is convinced Europe’s leaders are “plotting an EU superstate” but it remains very far from being a done deal. Ambrose Evans-Pritchard neatly points out that the Germans haven’t moved an inch towards the fiscal union. The opposition to fiscal union in Germany is formidable. There is even a constitutional problem, with Germany’s courts likely to block any quick move to fiscal union.

Myth 7: Youth unemployment in Spain is 50 per cent

Credit to Alan Beattie at the FT for debunking this one. The headline rate of unemployment used by the OECD does not measure what is ordinarily assumed to be unemployment. It is, in fact, a measure of jobseekers as a proportion of the labour market rather than as a proportion of the whole population. If you compare the number of young jobseekers with all their peers, including those in school, university or training the figure looks very differen
t. In Spain the number of those aged 15 to 24 who are neither in education, employment or training is more like 18 per cent than 51 per cent. This is lower than Italy. The figures for Greece are nearly identical.

Myth 8: It’s nearly over

Perhaps this is believed only at European Commission, which perpetually tries to exude a Crisis Over sang froid. Which fools no one (If you want a laugh here’s President van Rompuy in Pravda mode in 2011 claiming the crisis is over).

But how will we know when to remove the tin-helmets? Three things need to happen first:

1. All bad debts need to be declared, but with UK banks sitting on £40bn of undeclared losses, and Spanish cajas begging for yet another bailout, we aren’t there yet.

2. The future of the euro currency needs to be resolved.

3. Unacceptably high borrowing rates for Spain, France, Italy and Greece need to be addressed.

Japan had its Lost Decade. There is no iron law disbarring Europe from the same fate.


*Incredibly the 2009 EU report gloats over the American economists’ doubts over the euro.

“So far, the pessimistic forecasts and scenarios of the 1990s have not materialised. The euro is well established. The euro has not created political turmoil in Europe. It has fostered integration of financial, labour and commodity markets within the euro area. Trade has increased, and so has business cycle synchronisation.”

The report’s authors then refuse to claim the Americans must have been biased for criticising the euro.

“Allow us to speculate about two additional – probably minor – reasons for the US scepticism of the euro. First, we suspect that the US scepticism towards the euro was partially driven by political considerations. Some US economists may have feared that the euro would turn out to be a strong competitor to the dollar and that EMU would lead to Europe turning away from transatlantic cooperation, thereby weakening the role of the United States on the global scene. This suspicion may have been fuelled by the fact that claims of this sort were being made in Europe in the 1990s, in support of the single currency.

Finally, economists are trained to find faults with policy proposals and grand projects – the euro clearly belongs in this category – to be critical, in short, to have a scientific attitude. Given this propensity stressed in our professional training, it may be fair to conclude that there is a pessimism bias in our world outlook. In addition, the market for pessimistic forecasts is probably more attractive than that for optimistic forecasts. This may account for the fact that we have not been able to find any US economist making a strong case for the euro prior to its birth.”


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