Sleepwalking into the Euro nightmare

Professor Jesper Jespersen, an economics expert and visiting overseas fellow at Churchill College, will use his lecture ‘A European Nightmare: How could the economists be so wrong on the Euro?’ to suggest Greece’s need for another multi-billion bailout - and call for a fundamental shift in economic practice to prevent the break-up of the Eurozone as we know it today.

Jespersen, who previously advised the Danish Parliament on monetary union policy, says that despite reports of limited growth and rising optimism in some quarters, recession, social unrest and political turmoil will only worsen while crushing austerity measures continue to bite in central and southern Europe.

“This is a nightmare that could have been prevented. But the real nightmare is yet to come,” said Jespersen. “The economists who said monetary union would bring growth and stability were entirely wrong. Instead of trusting mathematical models that claimed such a crash would happen only once every thousand years - and losing sight of the realities - they should have stuck to real economics.

“People were blinded by the perceived benefits of integration rather than the actualities. They said the system could be detached from political interference; but those who imagined that were either naïve in the extreme or were part of the elite that stood to gain from monetary union.”

Now, argues Professor Jespersen, only a profound and fundamental rebalancing of economic hierarchies and financial policy can save from ruin those parts of Europe most affected by the unemployment and social crises.

He argues the most effective way to save Europe from its looming nightmare would be for Germany to accept its hegemony and reduce its huge balance of payments surplus – a surplus larger than that of China’s. Germany could display solidarity with its struggling European neighbours by using more money domestically and abroad, rather than strengthening its own position by accumulating more foreign assets. Then, the notion of a fairer, better balanced Eurozone, could be more likely.

However, the idea of Germany or any other surplus country eschewing national gains for the necessary stabilization of the common currency is not respected, perhaps hardly understood, and therefore largely inconceivable; a problem Jespersen argues has dogged the notion, and reality, of European monetary union from the beginning.

“The Euro countries are too different to make the idea of a single currency work by itself,” added Jespersen. “The EU Commission, the surplus countries and most economists say that countries in difficulty should just do as Germany has done. But that is a political and logical impossibility because all countries within a monetary union cannot run balance of payments surpluses. For every surplus country there has to be a deficit country otherwise the equation does not add up. So, Germany and other surplus countries have to reduce their balance of payments surpluses.”

Jespersen will also use his lecture to frame today’s current woes in an historical context; looking at the position of Germany before and after both World War One and Two and examining its status as Europe’s economic superpower.

He will also contemplate that for some nations, falling out of the Eurozone and returning to a sovereign currency, may be in the best long-term interests of the country as well as the EU as a whole, even if it proves inconvenient for the European elite in Brussels and for the economists who misjudged the consequences of a single currency.

Jespersen pointed to the 15 years of growth Britain enjoyed following ‘Black Wednesday’ and its exit from the Exchange Rate Mechanism – as well as Argentina’s departure from the currency board arrangement – as positive examples of what can be achieved. Jespersen argues that the European economy would ‘definitely benefit’ and begin growing from such a rebalancing; pointing to the growth of all EU member states outside the Euro (except Britain) since 2010.

“Things are getting worse from a social point of view,” said Jespersen. “The welfare systems of some southern European countries are in ruins in an unfair attempt from Berlin (and Brussels) to require balanced public sector budgets. Unemployment is still running at more than 25 per cent in Spain and Greece. Tensions are huge. Greece will need one more rescue package – they will default if they don’t get it. But there is an elite and a bureaucracy in Greece that has really benefited from the Euro and is still in favour of the Euro. There is huge Greek wealth abroad while the working people get their pensions cut.”

Jespersen said a worst-case scenario might see the Euro being dissolved all together except for a ‘greater German area’ including Germany, Austria and perhaps the Netherlands and Belgium. Breaking up the German/French axis would herald the dawn of an entirely different European landscape.
He added: “The present talk of tiny green shoots of growth as a vindication that ‘the medicine was right’ is misplaced. One should not forget that a balanced growth process implies 1.5-2 per cent yearly growth. Britain and Europe at large are still far below the normal growth rates. Growth, due to austerity policies, has been much slower than it could have been; therefore total unemployment in Europe is higher than ever before in the entire post-war period. Austerity is wrong from a growth perspective. Something has to change before prosperity will return to Europe.”

Professor Jespersen’s lecture takes place at 6pm on Monday, November 11 in the Bevin Room, Churchill College. All are welcome to attend.