Pipe Down, Euro Haters

Over the last few weeks, financial analysts and political commentators have taken particular pleasure in espousing the opinion that the 17-member eurozone is a failed experiment and should be broken up. A typical example was a Bloomberg piece titled, "Euro Was Flawed at Birth and Should Break Apart Now." While the article was published on April Fool's Day, there was no evidence of levity.

If you've read the Bloomberg piece, or any other anti-euro rant for that matter, then you needn't read any more, as they all march to the beat of the same drum. They first argue that the structure of the monetary bloc contributed to the current sovereign debt crisis by making it easy for fiscally profligate countries like Greece and Portugal to borrow, ostensibly with Germany serving as their guarantor. They then argue that the bloc's rigid monetary structure is impeding the Continent's recovery, because it doesn't allow for a tailored approach to fiscal and exchange-rate policies.

Two wrongs don't make a right
That both of these propositions are true, however, which they most certainly are, doesn't necessarily lead to the conclusions that the euro was a bad idea and should now be dismantled.

Setting aside the catastrophic economic and financial implications for the moment, it isn't without significance that the increasing political and economic entanglement associated with the common currency has succeeded at preventing a Continental war. Although this might not seem remarkable to the typical euro-hater, the tranquility of the last 60 years is most certainly an anomaly.

Prior to the two world wars, for example, there was the Franco-Prussian War of 1870-71, the Crimean War of 1854-56, and the Napoleonic Wars of 1803-15. And who could possibly forget about the descriptively titled Thirty Years' War and Hundred Years' War? And these are only the most commonly known conflicts. Suffice it to say, there are many, many more.

Throwing stones at glass houses
It's also helpful to remember that America once found itself in a similar situation to the one now faced by Europe. Like the European Union and its monetary bloc, under the Articles of Confederation, the precursor to the U.S. Constitution, our national government lacked the powers to tax or to ensure that its resolutions were implemented. It wasn't until the Compromise of 1790, in fact, that the federal government consolidated fiscally.

At issue was the question of whether the federal government would assume the Revolutionary War debts of the 13 states. James Madison argued that it shouldn't, in part because his home state of Virginia had already paid off much of its debt and thus should not be assessed again to bail out the less provident. Alternatively, Alexander Hamilton argued that it should, as that would secure the creditworthiness of the fledging republic.

After an impromptu meeting arranged by Hamilton's neighbor, Thomas Jefferson, the two sides came to an agreement. Madison acquiesced to the assumption plan, and Hamilton agreed to support a resolution locating the federal capital in the slave-owning states of Maryland and Virginia.

Be careful what you wish for
In addition, while breaking up the euro makes for a great theoretical argument within academia and among political commentators, the actual disassociation would trigger severe financial and economic repercussions. All told, the Continent's nearly $18 trillion GDP accounts for close to 30% of global GDP. Not to mention, what would happen to a company like Greek shipping giant DryShips (Nasdaq: DRYS  ) , which relies on access to international capital markets to function? Or how about European banks like the Bank of Ireland (NYSE: IRE  ) and the National Bank of Greece (NYSE: NBG  ) ? As my father likes to say, a lot of money would be going to money heaven.

Hitting closer to home, the ailing Continent imported $330 billion in American goods last year and served as a principal base of operations for any number of American companies. According to Forbes magazine, a full 10% of S&P 500 sales come from Europe. Just to name a few of the companies that would be hurt, McDonald's derives 40% of revenues from Europe, Philip Morris' (NYSE: PM  ) share is a massive 65%, and even Ford (NYSE: F  ) gets almost 30% of its revenue from European sales. A motley bunch of undervalued currencies, in other words, wouldn't do the American economy any favors whatsoever.

A better path forward
At the end of the day, I understand the attraction of lambasting the euro's founding and continued operation. As in the early days of the United States, however, the best solution is reform and not elimination. What's needed is a stronger and more integrated fiscal union, and not a Continent full of capricious infighting and competitive currency devaluations. We know for certain that didn't work, so why go back?

Fool contributor John Maxfield does not have a financial position in any of the companies mentioned above. The Motley Fool owns shares of Ford Motor and The Bank of Ireland. Motley Fool newsletter services have recommended buying shares of Philip Morris International, Ford Motor, and McDonald's. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 04, 2012, at 8:02 PM, imÖrtal wrote:

    A comparison of the Eu to the inception of the usa is a stretch in my opinion. True recovery is a default on debts that can't be paid and let the world rebuild from the ashes. Sound currency i.e gold backed money. To prop up the Eu combined 48trillion dollar debt is just delaying the inevitable.

  • Report this Comment On April 04, 2012, at 11:35 PM, Capivara wrote:

    A widely held belief is that democratic countries are historically less likely to start a war. If that is true, it would represent a significant difference between pre and post WWII Europe. Conversely, the EU has taken great pains to avoid a democratic birth.

  • Report this Comment On April 05, 2012, at 6:17 AM, DrVonSteiner wrote:

    True, the Euro break-up could be very costly indeed and could cause a huge amount of chaos and destruction of value all over the place. That's why this year's Wolfson prize is for the best solution to breaking up the Euro. Several interesting proposals have been submitted, which mitigate many of the immediate concerns of a break up.

    However, comparing the founding states with the nations of Europe is frankly, absurd. Besides the different languages, customs, cultures and economic expectations, the nations of Europe have (in ways the founding states did not) long histories of managing themselves. Some of them didn't do it very well, but at least they paid for their own mistakes.

    The Euro is managed by unelected, unaccountable bureaucrats that are appointed by other unelected, unappointed bureaucrats. To say that a "stronger and more integrated fiscal union is required" is to completely misunderstand the wishes of the many, many Europeans who consider that far too much power has already been given to the elite Brussels wastrels and power-mongers.

    How would you like, as a national leader, to be told how much you can tax your citizens? Want to reduce taxes? Sorry, chum, European rules say you can't (i.e. France is trying to implement such a rule now, because with its higher taxes, it is less competitive than the UK).

    There are so many other reasons why the Euro was and is a train wreck, and I'm sure all the articles you mentioned cover that. The politics of the currency make its appeal so much less when added to all the other reasons why it's a bad idea.

  • Report this Comment On April 05, 2012, at 10:43 AM, JohnMaxfield37 wrote:

    DrVonSteiner -

    The analogy to early U.S. history is mainly to demonstrate that federal integration takes time. It's not something that happens overnight, there are opposing interests to consider, and mistakes are made along the way. Looking back, however, we're in a much better spot today because of the integration.

    For the sake of argument, let's envision the future if the monetary bloc disintegrates and the countries begin to competitively devalue -- I know that I'm assuming the latter would happen, but I think it's reasonable.

    It doesn't seem to me that this scenario is in anybody's interest in so far as growth and stability are concerned. On the one hand, Germany would be hurt because it drives the mark up in relative value -- and thus injures its export sector. And on the other, the peripheral countries would be hurt because the extent of debt monetization necessary would likely trigger rapid price inflation. Not to mention, they'd probably be shut out of international capital markets like Argentina has been since 2001.

    Beyond this, without relatively strict capital controls, each of the spawned currencies would be like a dingy adrift in a storm -- the storm being international currency markets. Quite simply, in my opinion, this is just too volatile of a place to venture into if it can be avoided. If the future stays on its current trajectory, you'd be stuck between the dollar and eventually the yuan. So as opposed to unelected technocrats in Brussels, your monetary policy would be made by unelected technocrats in Washington and Beijing.

    In the short-term, is breaking up easier? Maybe. Maybe not. But in the long-term, I would say that it definitely isn't.

  • Report this Comment On April 05, 2012, at 2:00 PM, TheDumbMoney wrote:

    "Should" is a meaningless word for investors.

    For an excellent primer on why the Euro was flawed from the beginning see here:

    http://www.project-syndicate.org/commentary/a-centerless-eur...

    You are absolutely correct that the one alternative to disintegration is tighter fiscal integration. In short, the Euro must become more like the U.S., with less country identity, and with a federal government whose officials are popularly elected (as they are not now).

    But do you honestly think that is more likely than breakup? Setting aside the emotions of what you think is best, and your fears if we return to the Europ of 70 years ago, is that at all likely? No, bud, it's not.

    Accordingly, I foresee muddling through and attempts to staunch the bleeding, followed by breakup of the currency zone, or at minimum the exit of many many members that never should have been part of it. That does not mean the EUROZONE will die as a POLITICAL entity. Many aspects of it will live on; we will not in fact be back to the Europ of 70 years ago. (Many European countries to this day are not part of the Euro, and they are, with the notable exception of Germany for whom the present Euro acts as a hugely undervalued and stimulative currency, the ones doing the best.)

    We're not Euro haters. We are objective observers of fact. Coulda, shoulda, woulda. Who cares? What is objective reality, and how do we prepare? That's all that matters.

  • Report this Comment On April 05, 2012, at 3:14 PM, TrojanFan wrote:

    This will end however Goldman Sachs wants it to end because they are in complete control of how this process is unfolding. So you have to ask yourself what are Goldman Sachs interests and how well aligned with your interests are they?

    Goldman is now pricinpally a trading operation and their trading business loves volatility. Anything that creates chaos, complexity and information assymetry is what Goldman is all about. If the world changes rapidly in fundamental ways that are convoluted, opaque and difficult to understand, it places them in the enviable position of presiding over that chaos. They are banking on being able to figure out how the post crisis world works and what the new valuations are before everyone else AND they'll have an unfair advantage because their trading desks will always get a preview of what the new designs will look like before everyone else does. This gives them the opportunity to make enormous arbitrage profits on the collapse and redefinition of what currency is and how currency markets will work going forward.

    You think this is nuts? Look at all the critical posts that former Goldman executives have taken up residence in since this all began:

    http://www.independent.co.uk/news/business/analysis-and-feat...

    Furthermore, on the subject of freedom and democracy, the overwhelming majority of citizens don't want deeper integration. They want all of this to stop, but they are being told by their leaders, "Hush, hush little children. There, there. Don't worry. *WE* know what's best for you. Just trust us. We can't trust the ignorant populous with such critically important decisions by allowing them to be put up for referendums. You need elite and intellectually erudite leaders like us to show you the proper way because frankly, we're better then you."

    I love Nigel Farage remarks on this topic. He is a truly brave soul in the quest for democracy. He survives a plane crash, but remains undetered and continues his courageous railing against the political and economic oppression and subjegation by the ruling elite of Europe.

    This is one of my favorite clips of his in the EU parliament and I never get tired of watching it:

    http://www.youtube.com/watch?v=ULns-cSUeVs

    We are soon going to face a choice between the principles of democracy and capitalism because they are increasingly becoming mutually exclusive ideologies.

    My question to the members of the Motley Fool community is if you were forced to chose between the two principals, which matters more to you?

    This isn't an isolated debate in some far off land. These very same questions will soon be coming to our shores as well, so we would all be well served to ponder them before our debt bill comes due in the next couple of years.

    Are we going to sit back and allow the lieutenants of Goldman Sachs to foist their brand of structural slavery here upon the American people or are we going to have the courage to stand up and resist?

    To compare this situation to the conditions that existed at the dawn of our Federalist Republic is disingenuous at best because this situation is much more insidious then what was guiding the debate at the dawn of our country. This debate is all about strucutural subjegation and servitude and using debt and property rights as a means of acquiriing that influence and control.

  • Report this Comment On April 10, 2012, at 10:16 AM, tokelau wrote:

    As inhabitant of one of the nordic countries of the eurozone, it is my firm opinion that the euro is a miscreation, forged by nutty idealists. It doesn't have to disappear altogether, there are other solutions, but the cost of kicking some countries out or at least doing something unpopular apart from raising taxes once again, are as always strongly exaggerated. The cost of never ending bandaging will turn out to be much bigger.

  • Report this Comment On April 20, 2012, at 5:09 AM, DrVonSteiner wrote:

    John -

    A belated reply: I agree with your comments. It doesn't escape the suspicion many of us had about the Euro when it was forced on the unsuspecting population of Europe by the French and German Eurocrats - it's a total stinker.

    A federal currency can be a good thing if you have converging economies, but with the drastically different approaches to spending and tax policy all over Europe, it's bound to end in tears. The Eurocrats want to take even more control over fiscal policy and tax, which basically means taking over the fundamental sovereignty of the member nations. How can you be an independent nation if someone else tells you what to tax and spend?!

    Whichever way you look at it, the inflexibility of having a single currency has caused massive problems across the vastly different stretches of Europe. If the economies had been converging, it might have had a happy ending. As it is, I can't see that happening.

    Have you seen the latest? France and Germany are looking to enforce stricter immigration controls (something about Schengen changes) to stop job-seeking Greeks, Italians and Spaniards from 'stealing' their jobs. Free migration of labour and jobs? Pah!

    So you ask yourself, what is this "Europe" about anyway? One big labour market, free movement across borders, lower transaction costs, etc?

    More like socialist protectionism by the value-destroying wastrels in the European Bureaucracy.

    IMHO :-)

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