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?
