Yes, I Pretty Much Think the Euro is Doomed

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Could Europe cut Greece loose with only a moderate amount of pain and chaos? That’s steadily becoming the mainstream view, but Ryan Avent begs to differ:

Some are speculating that with Greece in the midst of a deepening depression and suffering from full-on capital flight, there is little risk to calling it quits. Indeed, if one is going to have an economic disaster, one might as well get a depreciation out of the bargain.

I suspect this analysis is wrong. Yes, a depreciation would boost the competitiveness of Greek exports, but I’m not sure that would matter much in the chaos following on an exit. Both people and capital would make a mad rush for the exits once it became clear that Greece would be leaving. In such circumstances, currencies typically overshoot on the way down. A plunging drachma would create intense inflationary pressure. That would no doubt be exacerbated by Greek funding needs; despite deep austerity it continues to run a large deficit and the temptation to fund it through printing will be strong. Hyperinflation would be a real possibility.

….I suspect matters would worsen for the euro zone, as well. Some now argue that exposure to Greece has been reduced sufficiently that the rest of the single-currency area could cut the country loose without too much financial trouble. That might be right. The question is whether this particular genie, once released, could be contained. The stakes of such a gamble would be enormous. If there were contagion, and if markets attacked Ireland, Portugal, and perhaps Spain and Italy, thinking that they could be next, the euro zone might be overwhelmed and driven into chaotic collapse.

So here’s my problem. I am, by nature, attracted to explanations based on deep, fundamental processes. Eurasia beat out the New World because they got an earlier start and had more powerful disease pools. The South inevitably lost the Civil War because their economy was weaker than the North’s. Standards of living have improved over the past two centuries primarily because of the march of technological improvement. Both hardware and software will continue following Moore’s Law until artificial intelligence becomes a reality and wrecks our current economy. Housing should not double in price nationwide when wages are stagnant, and if it does trouble will follow. Etc.

I’m not saying this view is always right. But I am saying that I think its track record is pretty good. Deep forces will win out in the long term no matter how many short-term fixes/obstacles are put in their way. In the case of the eurozone, there are deep structural imbalances — current account flows, productivity mismatches — that, on current form, look set to continue pretty much forever, and that’s unsustainable in a fixed exchange rate area. Since things that are unsustainable eventually break, that means the eurozone is eventually going to break. The only thing that could save it is a set of equivalently fundamental changes to Europe’s politico-economic governing structure, and there are darn few historical precedents for something like that happening within the space of a few years.

That’s still not impossible, though. Impending doom can concentrate the mind wonderfully on occasion. All I can say is that (a) deep forces usually win, and (b) organizations are rarely willing to address them at a deep enough level to hold them at bay. The problem is that the solution to a deep problem has to work with it, not against it, and it’s damn rare for either leaders or the led to have the vision to see this and act on it. So far the Europeans show no sign of being an exception.

So do I think the eurozone will break up, either wholly or in part? Yep. Could I be wrong? Absolutely. It certainly won’t go down without a fight. But unless European leaders suddenly do a volte face and decide to face up to the real issues at hand and deal with them aggressively, it’s hard to see a happy ending here. Don’t be fooled by day-to-day ups and downs and press conferences and six-month plans and demands for austerity. Those are just distractions. Instead, ask yourself if eurozone leaders are addressing the deep forces tearing them apart. If they’re not, they’re just marching toward a cliff that’s in plain sight and getting plainer every day.


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