David Frum
When the European Union created the euro currency, they created a disaster-in-waiting. Unlike the United States, which can never run out of dollars because it can always print more, the various governments of the eurozone could potentially run out of euros. The European Central Bank does not work for one eurozone government. It works for all the eurozone governments - and that's a very different thing.
If any one country suddenly needs more cash, it can only get that cash with the consent of all the other countries. Unsurprisingly, that kind of unanimity is hard to obtain.
And so what we're seeing now is a kind of slow-motion bank run, with investors losing confidence in country after country. Even France - the second-strongest economy in Europe - is threatened: France must now pay a full percentage point more interest on its bonds than Germany, the widest gap since the advent of the euro.
There are two escape routes from this crisis.
Escape route #1 is to bust up the euro. People who own Greek bonds will be repaid in New Drachmas. People who own Italian bonds will be repaid in New Lire. French creditors will get New Francs. And German creditors will get New Marks.
This first escape route will be an economic disaster, and not only for the poorer countries of southern Europe.
The French and German taxpayers who refused to bail out Greece and Italy will end up bailing out the French and German bankers who lent to Greece and Italy.
And the harm will not stop there.
Remember the country that profited most from the euro currency was Germany, the most productive country in Europe. So long as the euro existed, Greece, Italy and the other weaker economies of Europe could not devalue against Germany. The euro worked to make German exports cheaper - with the result that between 2000 and 2010, Germany's share of world trade rose by almost 9% - even as the shares of most other eurozone countries declined.
If the euro busts up, German exports to the rest of Europe will collapse - and German companies will relocate out of Germany into the other EU countries.
The Germans complain that the costs of rescuing the euro will fall on them. That's true. But it's also true that the benefits of the euro mostly accrued to them.
The euro currency allowed Greece to borrow more cheaply than it otherwise could. But the euro allowed Germany to sell more cheaply than it otherwise could. Who is the real winner in this story?
Which brings us to Escape #2.
If the euro is not to bust up, it must be saved.
Friday morning, The Globe & Mail reproduced on its front page one plan to save the euro. It looked as complicated as the design for a nuclear reactor: Arrows running every which way, incomprehensible acronyms strewn about the page.
All of that complexity that is designed is so much chaff, thrown into the eyes of the public to conceal the hard reality of what is actually being proposed:
Europe is about to create a new central borrowing power to assume responsibility for the debts of the weaker borrowing countries. To service these assumed debts, the new central borrowing power must gain a new taxing power. To prevent the problem from recurring, the weaker borrowing countries must surrender some of their spending powers.
Does that sound too technical? OK, put it more simply:
Europe is about to create a new super-government - and Greece, Italy, Spain and the others are about to be demoted to provincial or state local governments, subordinated to this super-government.
What Europe must do to save the euro is very similar to what Alexander Hamilton did in the United States in the 1790s to create the dollar. The new federal government assumed responsibility for the Revolutionary War debts of the former 13 colonies. The new federal government also took control of what was then the most important revenue source: Customs duties. The states were relieved of their debts in exchange for surrendering some of their taxing power.
But there is one huge difference between Europe today and the United States in the 1790s. The new American super-government was elected. The new European supergovernment won't be. Americans went into their arrangement with their eyes open, understanding the implications of their choice. European voters, by contrast, are being told that they are making a merely financial decision. As with the original euro decision itself, the true implications of the rescue plan will not be revealed until it is too late to reverse them.
When the European Union created the euro currency, they created a disaster-in-waiting. Unlike the United States, which can never run out of dollars because it can always print more, the various governments of the eurozone could potentially run out of euros. The European Central Bank does not work for one eurozone government. It works for all the eurozone governments - and that's a very different thing.
If any one country suddenly needs more cash, it can only get that cash with the consent of all the other countries. Unsurprisingly, that kind of unanimity is hard to obtain.
And so what we're seeing now is a kind of slow-motion bank run, with investors losing confidence in country after country. Even France - the second-strongest economy in Europe - is threatened: France must now pay a full percentage point more interest on its bonds than Germany, the widest gap since the advent of the euro.
There are two escape routes from this crisis.
Escape route #1 is to bust up the euro. People who own Greek bonds will be repaid in New Drachmas. People who own Italian bonds will be repaid in New Lire. French creditors will get New Francs. And German creditors will get New Marks.
This first escape route will be an economic disaster, and not only for the poorer countries of southern Europe.
The French and German taxpayers who refused to bail out Greece and Italy will end up bailing out the French and German bankers who lent to Greece and Italy.
And the harm will not stop there.
Remember the country that profited most from the euro currency was Germany, the most productive country in Europe. So long as the euro existed, Greece, Italy and the other weaker economies of Europe could not devalue against Germany. The euro worked to make German exports cheaper - with the result that between 2000 and 2010, Germany's share of world trade rose by almost 9% - even as the shares of most other eurozone countries declined.
If the euro busts up, German exports to the rest of Europe will collapse - and German companies will relocate out of Germany into the other EU countries.
The Germans complain that the costs of rescuing the euro will fall on them. That's true. But it's also true that the benefits of the euro mostly accrued to them.
The euro currency allowed Greece to borrow more cheaply than it otherwise could. But the euro allowed Germany to sell more cheaply than it otherwise could. Who is the real winner in this story?
Which brings us to Escape #2.
If the euro is not to bust up, it must be saved.
Friday morning, The Globe & Mail reproduced on its front page one plan to save the euro. It looked as complicated as the design for a nuclear reactor: Arrows running every which way, incomprehensible acronyms strewn about the page.
All of that complexity that is designed is so much chaff, thrown into the eyes of the public to conceal the hard reality of what is actually being proposed:
Europe is about to create a new central borrowing power to assume responsibility for the debts of the weaker borrowing countries. To service these assumed debts, the new central borrowing power must gain a new taxing power. To prevent the problem from recurring, the weaker borrowing countries must surrender some of their spending powers.
Does that sound too technical? OK, put it more simply:
Europe is about to create a new super-government - and Greece, Italy, Spain and the others are about to be demoted to provincial or state local governments, subordinated to this super-government.
What Europe must do to save the euro is very similar to what Alexander Hamilton did in the United States in the 1790s to create the dollar. The new federal government assumed responsibility for the Revolutionary War debts of the former 13 colonies. The new federal government also took control of what was then the most important revenue source: Customs duties. The states were relieved of their debts in exchange for surrendering some of their taxing power.
But there is one huge difference between Europe today and the United States in the 1790s. The new American super-government was elected. The new European supergovernment won't be. Americans went into their arrangement with their eyes open, understanding the implications of their choice. European voters, by contrast, are being told that they are making a merely financial decision. As with the original euro decision itself, the true implications of the rescue plan will not be revealed until it is too late to reverse them.
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