EU Economics

The Eurozone is the boulevard of broken dreams for the European Union. – (IS THIS THE BEGINNING OF THE END?)

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The Eurozone is the boulevard of broken dreams for the European Union.

The Mediterranean Union should find the courage to dismantle the Eurozone if the E.U. does not reform it in 2017.

The leaders of the Mediterranean countries must do whatever it takes to regain the control of the economic future of their nations in order for them to avoid a ”Greek-style” economic collapse, even if this means the breaking up of the Eurozone.

The first official summit of the EU MED Union was held in Athens September 9, 2016. Greece, Italy, Spain, France, Portugal, Cyprus and Malta have joined their forces in an official political union and demand a new vision for the E.U.

The Athens declaration of the 1st Mediterranean EU countries summit sends a strong message: ”We need more growth, more jobs, social justice and shared prosperity”.

”We, the Heads of State and Government of the Republic of Cyprus, France, Greece, Italy, Malta, Portugal and Spain, have gathered in Athens, with the aim of enhancing our cooperation and to contribute to the dialogue on the future of the EU.”

”Europe must keep its promise of prosperity and social justice. We need more growth and more investment to overcome the economic crisis, create jobs, protect our social model and prepare the future of our economies. We are determined to uphold the European social acquis and to promote social cohesion and convergence.”

The world hasn’t really realized what has happened in Europe the last 17 years. Europe’s elite aspired to create a common currency for the countries of the E.U. but instead they have created a very flawed economic system, the Eurozone, a fixed exchange rate system, in which its member countries do not have the basic tools to survive within the current market system of global capitalism.

Just take a moment to realize that the economies of the Eurozone do not have a Central Bank that will act as a real Lender of Last Resort when economic shocks occur. This means that the countries that gave up their right to print money to join the new European currency in the early 2000’s, are always extremely vulnerable to crises because they face immediate capital outflows when there is market volatility and economic uncertainty. Simply put, the European Central bank does not have the legal mandate to protect at any cost all the members of the Eurozone when systemic risk is high and urgent action is needed.

This became evident after the collapse of Lehman Brothers when the entire world economy entered an unprecedented financial crisis in 2008.While the Central Banks of the United States and Japan started immediately their extraordinary support to their economies using the well-known quantitative easing programs-QE, the European Central bank didn’t have the courage and the tools to do the same. In fact, the ECB started its QE program in 2015 with a six-year delay and only when the Eurozone was again on the brink of collapse due to the possibility of a Grexit.

Europe’s elite also didn’t plan for common bond issuance. Common Eurobonds do not exist since there is no finance ministry for the Eurozone. In addition, the depositors of the region do not enjoy the safety of a common deposit insurance that will guarantee them their hard-earned life savings when banking crises occur periodically. In contrast with the Eurozone, the U.S. issues treasuries to conduct the necessary fiscal policy for all of its states and insures the savings of Americans through the FDIC insurance.

For all these reasons, the Eurozone is in a constant confidence crisis since the tools that create the much-needed confidence for the markets and the investors do not exist. Consequently, since the basic pillar of the global capitalist system is confidence, the Eurozone has been heading from one crisis to another. From the risk of Grexit to the Cypriot deposit confiscation to the current crisis of the Italian Banking system to the possibility of another Portuguese bail-out. Sadly, the negative stories are the norm in Europe.

There is ample evidence for the EU MED Union to demand immediate action and reform of the Eurozone in 2017. The chronic mismanagement of the euro project and the failed austerity policies that Germany has imposed to the rest of the Eurozone, have brought previously unimaginable pain to formerly prosperous countries. Just to mention a few cases, Greece, Italy and Portugal are in the TOP-5 of the most indebted countries in the world with Debt to GDP ratios 177%,132%,129% respectively. Greece and Spain are in the TOP-10 of the highest Unemployment globally with 23.2% and 18.6%. Moreover, Greece and Cyprus are in the top-5 regarding their Non-Performing loans with 50% and 43% respectively. Italy also suffers with a very high NPL ratio which is near 20% and France is running a budget deficit of more than $80 billion per year.

Italy, Portugal, Spain and France along with Greece are likely to experience over the next decades very low growth compared to their real potential, very high Unemployment and crushing debt burdens if they continue to accept the current status quo. The already high social tensions will rise more to the extent that the anger of the voters will bring into power populist parties that will break up the Eurozone chaotically causing an unprecedented crisis for Europe and the global economy.

Germany, the biggest member of the Eurozone and therefore the most powerful, is the only country that has recorded huge economic gains from the new currency. Germany by leading the creation of the euro has managed to devalue at zero cost the very strong Deutsche Mark versus its main trading partners which are the rest of the Eurozone countries. Practically, if the Germans had kept their national currency, the Bundesbank would have to sell a substantial amount of Deutsche Marks in the currency market to keep it artificially lower and it would have to record losses on its balance sheet.

Unfortunately, the devaluation of the Deutsche Mark came at a very high cost for the competitiveness of the Mediterranean countries who on the other side started using an artificially overvalued currency for their economies. The MED countries gave up their more competitive and much cheaper currencies relative to the Deutsche Mark in order to reap the long-term benefits of a European common currency. They took their risks.

On the other hand, the Germans don’t want to share the risks of a common currency system but they want the reward that they already get from the free devaluation of the Deutsche Mark. The Germans have appointed as their Finance minister the 74-year old lawyer W. Schaueble who distracts intentionally the attention of the media away from Eurozone’s structural problems. Let’s not forget that this is the same politician who against the E.U. laws tried to change Greece’s currency two times in 2012 and 2015 causing two bank runs that demolished the Greek banking system.

The newly formed Mediterranean union has the power to be the game changer that Europe needs.

The European Central Bank must expand its mandate to include the targeting of low unemployment across the entire euro region along with maintaining price stability. A finance ministry should be created to conduct fiscal policy by issuing Eurobonds and to be accountable for the economic progress of all members. Common deposit insurance is needed to safeguard the life-savings of the Europeans and a common unemployment insurance will act as a safety net for maintaining social cohesion. There is no economic reasoning for the Mediterranean countries to participate in the Eurozone if the E.U and Germany are not willing to accept these reforms.

The Eurozone is the boulevard of broken dreams for the European Union and a historic economic catastrophe for a large part of it, especially for the Mediterranean countries that are trapped in the vicious circle of permanent austerity that the Germans have imposed. Courageous action is needed on behalf of the Mediterranean leaders to bring an end to the needless pain.

The EU MED Union must leverage its power to exercise enormous pressure to the E.U and Germany to reform the Eurozone within 2017. There is no more time to lose, the pain is enormous and is rising day by day for the Mediterranean societies. If Europe’s elite still refuses to make the necessary reforms that will create a truly viable common currency, the Mediterranean Union should find the courage to ask the dismantlement of the Eurozone to avoid the predictable collapse that is coming.

This article was written by YIANNIS PATRIKAKIS for on .

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