How Europe got it so terribly wrong

Three weeks ago I took money out of an ATM in Cyprus, leaving a balance of only €30, which I felt might be a little low. I had just had a delicious meal of grilled lamb in a restaurant on Larnaca’s promenade. A light breeze on the front had been enough to fuel an appetite.

Those few euros might well now be consigned to oblivion, as the island’s government may have to contemplate leaving the Eurozone and re-issuing its own currency, according to one interpretation of the flurry of reports about where this crisis is heading. The hit to living standards would be very hard, and the disruption similarly heavy, but at least there would be a viable and freely-followed future on the horizon.

At the moment there is only the nightmare induced by the Eurozone, whose fundamental and undemocratic idiocy as an idea should have meant it never got off the ground, let alone wreak such havoc now. Once the beacon of policymaking vanity and ambition — though featuring quite a useful single currency for holidaymakers to Europe — now its economic and moral destructiveness is on display for all the world to see. That European emperor of a project is absolutely naked, let it be said.

Twenty years ago, those occupying the eurosceptic fringes on the debate about European monetary union were routinely dismissed as outdated cranks. Needless to say, their earnest reservations have been proven thoroughly justified.

Frankly, it’s not rocket science, and not inviting of the interminable thickets of discussion on banking workouts, sovereign bond finance and relentless monetary expansion. At its core, the euro is the problem that must be undone for the crisis to, eventually, be resolved.

Simply, it was always nonsense to suppose that a single exchange rate and single interest rate could be right for the entirety of the euroland area. Is there a sentient, intelligent adult alive who does not know that different countries and regions are not equally competitive, and must, therefore, not be locked into a potential state of permanent disequilibrium?

Of course, Europe’s elite knew that. They planned that the ensuing misallocation of resources would be treated by forging (I use the word advisedly) a political union, a superstate in which resources are perpetually transferred by an overarching nomenclature from one country to another, as Germany already does from its west to east since reunification.

The dreadful miscalculation on the part of the other member states was to imagine that the more productive, more competitive Germany would happily and indefinitely finance the perpetually and increasingly less productive, uncompetitive welfare states and rigid economies elsewhere in the Eurozone. Perhaps they honestly believed in that fanciful notion of ‘social solidarity’.

In fact, of course, Germany has a very well-known mercantilist mentality, of winners and losers. Their preoccupation is to win, on the level playing-field of a shared currency, where the neighbouring ‘partners’ could not devalue to smooth their experience of relative decline.

Meanwhile, the excessively low interest rates and slack financial regulation that applied across the Eurozone (and indeed the world economy) led unerringly to a catastrophic boom and bust. The rates that should have applied only to Germany utterly distorted perceptions of creditworthiness and sustainability elsewhere. The peripheral countries of the Eurozone borrowed frantically to consume and buy real estate, living well beyond their means.

Germany is undoubtedly right to point that out, but it is of course completely complicit in this collective experience. Indeed its own banks are critically exposed to those self-same countries and their accumulated excesses, while its balance of payments on current account shows a degree of surplus that has been artificially accentuated by its unduly low, common exchange rate. Germany combines acute financial overexposure to the rest of Europe with chronic exchange undervaluation.

Those who blame Germany simply don’t understand what the EU is about at its core, originally and still a project to enforce Franco-German leadership over an entire continent. However, the French have failed to keep pace economically — not surprisingly given the statist model it has sought by way of the EU to protect — and have therefore lost political clout.

Equally, Germany’s critics are quite simply wrong to suppose that the inherent flaw of the Eurozone can be mended by simply recycling northern Europe’s surpluses to the mainly southern countries in deficit — on the very basic grounds that it’s just not going to happen. The funding populaces simply won’t pay that bill forever, and the recipient nations equally are not interested in being bossed around forever. QED. The other, much-favoured option of euro-sympathisers, of collectivised reflation, is not a runner either, anathema to Germany especially.

At time of writing, then, those of us who have resisted the perpetuation of this politico-economic absurdity are delighted to find that little Cyprus has quickly called time on the undisguised bullying by the big brothers. Regardless of the allegedly dubious nature of much of the Russian money on the island, or the ridiculously bloated state sector, a raid upon savers’ deposits to pay for the relentless obsession of the elite and its unconscionable objectives was a step too far. Inter alia, it has revealed the true nature of the European project.

Almost incredibly, as a result, the vital strategic location and interest that is Cyprus may well be easing itself out of Europe and into the Russian sphere of influence, with the obvious ramifications. Again, who needs reminding that Cyprus, harbouring two British military bases as UK sovereign territory, is 60 miles from an inflamed Syria, 40 miles from Turkey, and close to the nervous environs of Egypt, Libya, Israel, Iraq, Iran, and indeed the entire Middle East.

Europe’s stupidity indeed appears to know no bounds, and incidentally Britain’s relative silence on the whole matter is both deafening and disturbing. The likely incurred cost to reputation and potential contagion effect of the aborted bailout plan absolutely dwarfs the chickenfeed amount it requires to take care of the Cyprus issue in toto, compared to the enormous sums already devoted to massaging the financial calamity across the Eurozone.

If and when Cyprus does abandon the euro, when would Greece follow? And then Portugal, then Spain, and Italy? Chaos might reign, and the conspiring political cadres would have only themselves to blame.

In a nutshell, the Eurozone should be dismantled, with all that entails, to undo this abiding state of madness, and allow a generalized recovery on the tried and trusted basis of selective default, realigned exchange rates, structural reforms, and the motivation that comes only from freedom from oppression — painful though all that would be, the legacy of shocking, ingrained political hubris and the associated, blinkered commitment to a deluded plan, on a continental scale.

And beyond that? What to do in the face of such monumental failure among the entrenched political class, clownish and arrogant beyond belief at one and the same time? How seriously to eradicate their patently self-serving, miserably misguided wilfulness, so as to restore sanity, justice and some path to prosperity?

A well-known commentator in the card-carrying, euro-indulgent Financial Times this week observed that Cyprus’s initial bailout plan was like the proverbial horse designed by a committee. Yet that suggestion misses the point, the much bigger picture. It is the original concept of the euro itself that was so deeply at fault, and the illogicality and illiberality it inflicts should not be allowed to persist.

It would indeed be ironic and heartening if Cyprus proved to be the straw that broke the European camel’s back.

Andrew Shouler, based in London, is an economist and formerly Deputy Managing Editor at Gulf News. Views expressed here are his own.