Regular readers have often heard me compare the Euro to the gold standard. In effect, the Euro as a single currency system is restrictive in exactly the same ways that the gold standard was restrictive. I have referred to this as the “inefficient market irony behind the Euro crisis“. I haven’t seen the comparison made too often elsewhere until reading the Financial Times the other day. Edward Chancellor of GMO beautifully describes the restrictions of single currency systems and why they ultimately fail:
“The euro has also failed to meet the expectations of its exponents. Like the gold standard, it lacks a self-equilibrating mechanism. Instead, countries with chronic trade deficits, such as Greece and Portugal, have relied on the recycling of trade surpluses from Germany. Their economies buckled when lending dried up.
Several eurozone members, including Italy and Ireland, have seen their production costs rise relative to Germany. Under a floating exchange rate regime, they would simply devalue. Within the eurozone, however, they are forced into deflation to regain competitiveness.
Having surrendered monetary independence long ago, eurozone members are now losing their fiscal freedom of action. Angela Merkel’s Germany, a top creditor nation and modern scourge of profligacy, plays the role of France in the 1930s.
The burden of the euro is getting heavier. Spain’s unemployment rate has reached Great Depression levels. Ireland is experiencing its severest deflation since the 1930s. Greece and possibly Portugal are on the verge of default. The pain thresholds of the eurozone economies may well be lower than in the 1930s, since debt levels are far higher.
In one respect, the euro is worse than the gold standard. The costs of going off gold turned out to be negligible. Leaving the eurozone may be much harder. Any country that signalled such an intention would most likely spark a run on the banking system and a collapse in government lending. The entire eurozone financial system would also suffer collateral damage. Euro-fetters are proving scarcely less agonising and certainly more binding than the golden variety.”
I couldn’t agree more. In my opinion, the currency union was founded on false premises and only continues to this day because so much political will has been invested in its success. Although I believe the Euro is destined to fail I also believe the European politicians will continue to impose a great injustice on their citizens. Unfortunately, there is no bailout or political will that will help it to succeed and any politician who believes that the Euro should continue to exist does not grasp the economic instability caused by the Euro and is allowing his/her ego to destroy the lives of their citizens via the continued use of a flawed currency system. Ultimately, however, the citizens will awaken to the flaws of their currency system. They will either force change preemptively or economic downturn will force change upon the Euro area.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.