How could a set of such mismatched economies hope in the longer term to be served by a common currency when the essence of how modern economies work is that they rely on fluctuating exchange rates to determine the relative buying power of their trading partners.
If I want to sit in the sun and watch my fruit grow while you ferret away at developing fancy technology that I want, I may have to sell you tonnes of my fruit to be able to afford one of your fancy pieces of technology.
Considering that the individual eurozone members have notably different productive capabilities, it was always only a matter of time before a common currency would threaten to bring them all down.
I was not paying attention to this when the eurozone was first mooted, perhaps in part because I was taken up by the euphoria of the united Europe the fall of the Berlin Wall offered.
So I was thankful to a German diplomat who gave me a crash course in the subject. With the Berlin Wall down, the Germans wanted reunification, but other Europeans, notably the French, were less than keen on this – splitting Germany was a penalty imposed after World War II as a disincentive for the Germans to go to war against their neighbours again.
French president Francois Mitterand had a single condition for him to agree to German reunification: monetary union, the idea being that you will not go to war with a neighbour with whom you share a common currency.
So politics trumped economics and the eurozone was born.
For a long time, it was all hunky-dory as borrowers and lenders went on a spending spree as though they were all triple-A rated, which they were not. But money was cheap.
Then the poorly managed Greece ran up unsustainable debts, in part by buying vast amounts of arms. The Guardian reported that Greece was the world’s fourth-largest importer of arms from 2002 to 2006 and is now the 10th largest importer.
Now the whole of the eurozone is threatened with financial armageddon. Leading voices who have warning of imminent catastrophe include billionaire George Soros and out-going World Bank chief Robert Zoellick.
But as interesting as this story is, what is truly fascinating is who holds Greece’s debt. As quoted by the New York Times, using investment bank UBS as a source, about three-quarters of Greece’s debt, $229-billion, is in effect owned by a troika – the European Union, the European Central Bank (ECB) and the International Monetary Fund.
If you are unsure who ultimately picks up the tab, think taxpayers. As explained by Deutsche Bank’s Thomas Meyer, the ECB in particular wants to be paid back. It bought billions of euros in Greek bonds to calm financial markets.
“It’s why they want to get paid back every month now,” he told the New York Times. “The ECB bought at a high price and now insists in being paid in full.”
So the troika is trying to put pressure on Greece to collect more tax revenue to service the debt.
Overrun by a conquering army
Since May 2010, Greece has been loaned $177-billion – European taxpayers’ money – to keep it afloat. Of that, two-thirds has gone to pay bondholders and the troika, the newspaper reported.
It is estimated the ECB’s Greek debt is between $44-billion to $68-billion, and the European Financial Stability Facility’s exposure to Greek debt is $88-billion.
The ECB makes loans on terms that exclude it from being part of any restructuring deal and part of the loan goes straight back to it as an interest payment.
Whatever you think of the Greeks and the mismanagement of their economy, as a nation they must feel as if they have been overrun by a conquering army – exactly what monetary union was meant to prevent.