The Inevitable fall of Euro & the EU

Those who are hoping for a more optimistic outlook of the global economic future should probably not read on.

According to a report released in 2011 by the Union Bank of Switzerland entitled “Euro Break up-The Consequences,” the death of the euro is inevitable and the long-term effects of such an event will potentially include civil war, the collapse of international trade and sovereign default. What makes such an assertion so frightening is that the UBS has a hegemonic influence over the world economy.

The UBS is the world’s second largest manager of private wealth assets and maintains over $2.68 trillion in assets-much of it invested in Europe and Euro assets. The report also suggests that Germany is also considering leaving the Euro.

Despite an agreement reached this summer by Eurozone leaders to provide Greece with a second bailout package, many international investors and financial markets are predicting the country will default on its debt obligations. A Greek default could bring down the indebted economies of Spain and Italy.

With French banks also heavily exposed to Italian debt, this would likely set off a European banking crisis that would threaten to unravel the entire single-currency zone. Economists and investors have cautioned that such a scenario could ripple through the U.S banking sector and trigger another global financial meltdown. There is only one country in the euro zone capable of bailing out the euro zone members: Germany. And we are nearing a situation where the cost to Germany exceeds the benefit.

Germany is the world’s third-largest exporter, after China and the United States. By forming a free trade zone, the Germans created captive markets for their goods. But once a crisis hit, the inability of Greece to devalue its money — which, as the euro, was controlled by the European Central Bank — and the ability of Germany to continue exporting without any ability of Greece to control those exports exacerbated Greece’s recession, leading to a sovereign debt crisis. Moreover, the regulations generated by EU so enhanced the German position that Greece was helpless.

Given the political difficulty in implementing austerity measures, usually a country’s currency is devalued. However, there was no Greek Drachma to devalue. The country is stuck in the euro zone. The only choices the country has are sovereign default, extreme austerity, return to the Drachma — or being bailed out. It has to be remembered here that the Euro was adopted in Germany without any democratic vote by the German electorate. In fact, there was a lot of concern in Germany at the time that the Germans would have rejected the Euro had it been voted upon – and this is the very reason a vote was not held.

There are growing calls within Angela Merkel’s center-right coalition to let Greece default and, potentially, leave the Eurozone. Despite Merkel’s warning that it is in Germany’s interest to keep Greece in the Eurozone, Der Spiegel (Germany’s weekly news magazine with a weekly circulation of more than one million) reported that German Finance Minister Wolfgang Schäuble is working on contingency plans for the continent in the event of a Greek default.

Germany and Greece each have explanations for why the other is responsible for what has happened. For the Germans, it was the irresponsibility of the Greek government in buying political power with money it didn’t have to the point of falsifying economic data to obtain Eurozone membership. For the Greeks, the problem is the hijacking of Europe by the Germans. Germany controls the Eurozone’s monetary policy and has built a regulatory system that provides unfair privileges, so the Greeks believe, for Germany’s exports, economic structure and financial system. Each nation believes the other is taking advantage of the situation.

In the end, Germans are Germans and Greeks are Greeks. Germany and Greece are different countries in different places with different value systems and interests. The idea of sacrificing for each other is a dubious concept. The idea of sacrificing for the European Union is a meaningless concept. The idea behind EU was that you will like Europe because it will be prosperous, and with all of Europe prosperous there will be no need to choose between your nation and other nations. But when the prosperity stops, the justification to avert conflict evaporates.

Prosperity comes and goes, and as it goes sacrifice is needed. And sacrifice — like wealth — is always unevenly distributed in capitalism. That uneven distribution is determined not only by necessity but also by those who have power and control over institutions. From a national point of view, it is Germany and France that have the power, with the British happy to be out of the main fray. The weak are the rest of Europe, those who surrendered core sovereignty to the Germans and French and now face the burdens of managing sacrifice.

There had long been a minority in Europe who felt that the European Union had been constructed either to support the financial elite at the expense of the broader population or to strengthen Northern Europe, particularly France and Germany, at the expense of the periphery or both. What had been a minority view was strengthened by the recession.

The crisis worsened due to the fact that Europe did not act as a single unit but instead worked on a national basis, with each nation focused on its own banks and the European Central Bank seeming to favor Northern Europe in general and Germany in particular. This became the theme particularly when the recession generated disproportionate crises in peripheral countries like Greece.

Classical political economists like Adam Smith or David Ricardo never used the term “economy” by itself. They always used the term “political economy.” For classical economists, it was impossible to understand politics without economics or economics without politics.

Under the current structure and with the current membership, the Euro does not work. Fragmentation of the Euro would incur political costs. It is getting to a point where the Euro and EU will be a historical concept.

Writer is a Finance and Economics Graduate from UK and work at KPMG.