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Why I think the euro is going to last for a good while yet

There seem to be lots of people out there who think the euro is about to collapse. They talk about Greece or Italy leaving or of Germany leaving or the creation of ‘hard’ and ‘soft’ euro zones. I beg to differ.

Let me explain. There is one thing that people in the Anglosphere often fail to understand: euro-federalists are euro-fanatics. They (the euro-fanatics) seriously believe that should the European Union fail or take a step backwards or even stutter, then Europe would more or less instantly be plunged into war.

Now, us sceptics might ask why it was that there was no war between 1945 and the founding of the European Community (1958, if I recall correctly) or why, if a European Community was all that was needed to preserve the peace up to 1992, it was necessary to create the European Union, but we would be wasting our breath. This is not something that has anything to do with logic or reason. Euro-fanaticism pretty much took over where religion left off.

When push comes to shove nothing else matters. So, when Germany’s politicians are given a choice between the breakup of the euro and a Weimar-style hyperinflation fueled by the European Central Bank printing press, they’ll choose the hyperinflation. Inflation at 20%, 200% or 2000%? It won’t matter: they’ll do it.

And that is the choice they will be given. The PIIGS: Greece, Portugal, Ireland, Spain and Italy are bust. They cannot pay their bills. In itself this would not be a problem. As far as the European project is concerned these countries are expendable. France, however, is not. France is absolutely central to the project. After all, without France there would be no one to go to war with. French banks have lent enormous sums to the PIIGS. If the PIIGS go bust (possibly only even one of them) France’s banks go bust. Now you and I might think “serves ’em right” or “well, that’s how capitalism creates wealth: by weeding out loss-making enterprises” but that’s not how the euro-fanatics think. They are no less wedded to the theory of ‘too big to fail’ than Hank Paulson – the US Treasury Secretary who bailed out US banks in 2008. So, France’s banks will be bailed out. But France can’t afford to do this. So, it will have to print money. But France can’t print money. So, it will have to get the eurozone to do it instead. Enter the ECB. Enter hyperinflation.

The good news is that hyperinflations can’t go on forever. At some point Europe’s hyperinflation will end but it will end in different countries at different times. The different times will dictate that there will, in the end, be a euro breakup, but the hyperinflation will happen first. We just have to hope that the breakup of the euro and possibly even the EU doesn’t trigger the very war it was designed to prevent.

18 comments to Why I think the euro is going to last for a good while yet

  • Rob H

    I would just add that all the major economies currently participating in the great money printing game will all follow suit.

    When all your major trading partners are devalueing you can all do it together and less people notice.

    Just watch the exchange rates between the stable, independent nations and the western ones, do not compare western with western.

    Didn’t I also read that the swiss had pegged to the Euro too? Wonder why.

  • Laird

    That all makes a certain amount of sense, but when it comes to stoking hyperinflation even though the German politicians may want to do so do you really think the German public will permit it? More than any other people the Germans have a racial memory of the disaster wrought by hyperinflation; the Weimar episode occurred within the memories of some still living. I would think that among politicians there would be a real fear that if hyperinflation were once again loosed on the nation some of them would be found hanging from lampposts (quite literally, and definitely appropriately).

  • Laird

    Ach du lieber, Ich bin smited! Still, it has been a while since that last happened; perhaps I’ve been too temperate in my remarks of late.

    Tell them, The men that placed him here
    Are scandals to the Times!
    Are at a loss to find his guilt,
    And can’t commit his crimes!

  • Now, us sceptics might ask why it was that there was no war between 1945 and the founding of the European Community (1958, if I recall correctly)

    Because, despite the bullshit espoused the Euro Federalist fanatics, it was not the EU, the EEC or any of the proto-EU institutions going back to the Benelux Coal and Steel community.

    What has prevented widespread general war in Europe was one thing and one thing only – NATO.

    So Fuck Off Barosso!

  • I think Patrick is correct… and btw, welcome to Samizdata, Patrick.

  • Snorri Godhi

    This post is based on the assumption that the euro-fanatics have absolute power. In fact, the rise of the so-called “far-right” (sometime fascist, sometime true i.e. classical liberal, but always euro-skeptic) suggests otherwise.

    Let me propose a different scenario: France might indeed persuade the ECB to print more money, but as soon as smart investors realize that that is happening, they’ll start dumping euro-denominated bonds, thus driving up gov. borrowing costs. For every 1% of expected inflation, investors will demand 1% more interest on their bonds. With debt of 80% of GDP, Germany is in no position to pay higher interest rates even before inflation starts to take off. So I don’t expect the German gov. to allow high inflation, let alone hyperinflation.

    At this point, my scenario bifurcates.
    One possibility is that some small, fiscally-responsible country with a strong “far-right” leaves the eurozone, providing an excuse for Germany to do the same.
    Another is that Germany demands a stop to euro inflation, driving some countries to default.

    But the 2nd scenario is not necessarily the end of the euro: once the default has happened, the defaulting countries have no more access to capital markets, and therefore no incentive to create their own currency in which to borrow. (And in fact it would be even more difficult for them to borrow in their own currency than in euros.)

    The prospect of closer “fiscal union” raises some other interesting issues: the PIIGS might have to take it or leave it, but why should the small, fiscally-responsible countries take it? might they decide that they are better off out?

  • Midwesterner

    Welcome, Patrick.

    Perhaps I’m brain muddled or it may be my US centered perspective, but I am having some difficulty visualizing your last paragraph. In the US, regional inflation is pretty well limited to things that can’t be moved, principally real estate. Other perceived regional inflation is usually not a monetary phenomenon but rather a regulatory or tax driven price differential.

    How will euro hyperinflation end at different times in different places? Or are you saying that different regions will exit hyperinflation by exiting the euro once their euro-denominated debts have been inflation trivialized into solvency?

  • Suits you right, Laird, for calling memory the dreaded ‘r’ word. Speaking of which, you are obviously giving that collective memory too much credit. Witness how everyone “knows” that there was no society to speak of before socialized medicine and state-run education, etc. I also think that Merkel (or whoever follows) will print like every other “sensible” politician. That said, I’d love to be contradicted by someone who actually lives in and knows Germany well.

  • Rich Rostrom

    Yes, Germany has ancestral memory of hyperinflation.

    Germany also has ancestral memory of losing an enormously destructive war.

    Which reflexive terror is greater?

    The Eurocracy does not have “absolute power” de jure, but de facto they do what they want and the people are required to submit. Recently the German Bundestag voted overwhemingly for a Greek bailout that (according to multiple polls) the German people opposed overwhelmingly.

    S. Weasel summed it up beautifully: “They are absolutely terrified of another war… are convinced that what caused both World Wars was nationalism… and think they can (and must) break people of being tribal… This isn’t an economic union to them, it’s survival.”

    I don’t think that anyone thinks the failure of the EU would instantly lead to war – what they think is that if the EU project fails, it will start an irreversible slide toward war-producing conditions.

    After all, the conditions which led to each World War had been in place for several years before the balloon went up. It’s not that the end of the EU would be 1914 or 1939 redux – it would be 1905 or maybe 1932, but both of those years were well en route to the subsequent calamities.

  • Midwesterner, what I meant in that last paragraph is that although everyone will get sick of hyperinflation in the end different places will get sick at different times. That is the point at which they will exit the euro. So, for instance, when euro-wide inflation hits 100% the Dutch might call it a day and re-introduce the guilder, but it might have to hit 1000% for the Greeks to throw in the towel.

  • Midwesterner

    Thank you Patrick. That clears it up for me. If that happens, I think the best countries leaving first will lead to the euro being dominated by the worst basket cases and the euro will soon cease to have any credibility and consequentially, any benefits of membership.

    I’m having deja vu with respect to wondering what the EU oligarchs will do. It recalls the study of Soviet era photographs for signs of future policy direction. If somebody is seated closer to the chairman, it means his policy proposals are on the ascendancy.

  • Antoine Clarke

    I think you have Germany wrong, Patrick.

    “When push comes to shove nothing else matters. So, when Germany’s politicians are given a choice between the breakup of the euro and a Weimar-style hyperinflation fueled by the European Central Bank printing press, they’ll choose the hyperinflation. Inflation at 20%, 200% or 2000%? It won’t matter: they’ll do it.”

    If there’s one thing everyone in Germany agrees on it is that hyperinflation was the open door to Hitler.

    So apart from the economic and social arguments against hyperinflation, there is the bogeyman that German politicians were told about on cold winter nights by their surviving grandparents.

    What is being tossed out is democracy: Greece and Italy so far, presumably France next if Le Pen wins.

  • Steve M

    My understanding is that it is only the exiting “Boomer” generation of European leaders who are truly “Euro-fanatics”. If so, it may end sooner than ye think.

  • So, the Germans have a choice: hyperinflate and risk a world war or don’t hyperinflate and risk a world war.

    There is, incidentally, a point that CNBC’s Sylvia Wadwha likes to make: that the opposition are just as committed to the bailouts (and by extension printing money) as the government. The German population can be as against inflation as they like but there’s nothing they can do about it.

  • Hmm

    The most useful thing about any currency is that it is a partial abstract. The EU has been overstrectching the euro’s abstract nature as far as they possibly can; all the while hoping that no-one will ‘notice’ the problems this creates. This is not a problem for the euro provided the abstract remains useful for the players involved. A greater ratio of abstract possibilities means the euro will remain. If it becomes more useful (for any single player) to void the abstract then the euro will almost certainly collapse.

    The question I think most relevant is: Which players gain from deiciding to deny any usefulness of the euro?

  • Paul Marks

    As Jim Rogers (and others) have pointed out….

    The very policy that the international establishment elite demand – the unlimited creation of new Euros (from NOTHING) to bailout national governments and the banks who have lent them money) – is the policy that would destroy the Euro.

    Talk of “contagion”, “fireepower” and so on (that one hears in the media, and from politicians, every day) just misses the point.

    If a government can not pay its bills it goes bankrupt. And the banks who lent money to it go bankrupt also.

    Well that is very unsetting (and causes vast suffering) but it does NOT destroy a currency.

    What destroys a currency is “unlimited” (the word the Economist magazine, and so on, use to describe their policy) monetary expansion in a desperate effort to bailout everyone.

  • Hmm, what do you mean by ‘abstract’ and ‘abstract possibilities’?

  • Rich Rostrom

    Antoine Clarke: If there’s one thing everyone in Germany agrees on it is that hyperinflation was the open door to Hitler.

    Really? The hyperinflation was in 1923, and the Beer Hall Putsch was at the height of it. The Putsch failed completely. Schacht stabilized the currency, and Germany had six subsequent years of relative peace and prosperity. During that period Hitler was a marginal figure and the NSDAP drew around 3% of the vote (2.6% in 1928).

    The hyperinflation may have contributed to the demoralization of the German people and made them more vulnerable to Hitler’s demagogy when the Depression hit. But it doesn’t seem to have done much for the Nazis by itself.