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You are crazy!

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When the crisis hit, it hard. Numbers don’t hurt, but cancelled weddings and bankrupt friends do. This crisis isn’t the USA in 2008 nor Greece in 2011. It’s Argentina around 2000.

What happened? After a disastrous inflation history, Argentina decided to lock it’s currency to the US dollar in a ratio of 1:1. In the beginning it did miracles for the Argentinian economy as one of the biggest barriers for foreign investments (exchange rate loss) was removed. In the long run it proved to be a disaster for the Argentinian economy. Year by year the argentineans couldn’t keep up with the USA productivity growth. Therefore the country became each year a bit more expensive. Unemployment started to grow, which was the beginning of a downward spiral of which Argentina couldn’t escape. In the end Argentina devaluated 75% to a ratio of about 4 Argentinean pesos to 1 US dollar.

Over a decade later, everybody and their brother has an opinion about the European financial crisis. I have one too. Historically, all concerned countries saw their currencies depreciate against the Deutschmark. Sometimes they had succeeded in lockin their currencies, but inevitably they devaluated. This hasn’t happened in Europe since the introduction of the euro. Despite that the euro changed some minor rules of the game, the Greek, Spanish, Portuguese and Italian economies still can’t keep up with their big German brother. And that isn’t necessarily bad. Unless you’ve got the same currency…

A currency which is shared between two countries is unfair to one country, two countries or both. As there is only 1 exchange rate and there are 2 countries. The euro is oriented towards the country with the strongest economy and central bank: Germany. Thanks to the strong German economy and Germany’s fear of inflation, the euro has been a very strong currency, increasing in value (most notably) against the US dollar. This is good for a strong economy, but disastrous for weaker economies. Nowhere this is more visible than in Spain.

The Spanish peseta was one of the weaker currencies when it joined the euro. The economy boomed due to European subsidies and a housing boom. When both disappeared, the Spanish needed to compete on ‘normal’ terms with other countries. Which they couldn’t. Unemployment exploded to over 20%. With such high unemployment the country goes to hell. The government spends all its money on unemployment benefits and social welfare, leaving no room to invest in economic growth generators like education. Foreign investment halts due to economic uncertainty. The smartest and richest people leave the country, all accelerating financial doom.

How can you can a country escape? The most frequently heard solution is to keep them in the euro and support a country through these difficult times. As noble as it sounds, it grossly underestimates the severity of the problem. My personal estimate is that the troubled countries probably are overvalued between 25%-40%. Supporting all these countries until they have a competitive economy again takes at 15-20 years of frozen or negative growth in salaries. Unrealistic.  

The other solution is to do it the ‘Argentinean way’. This means that the affected countries would default on their debts and get their own currency back. That currency would be weaker than the euro, and keep their economies competitive globally. Why would this be a better solution? First of all, it addresses the fundamental causes of the problem: competitiveness of the economy due to a fixed exchange rate with other economies that behave very differently than their own. Secondly, it prevents the social situation from escalating. These countries were semi-dictatorships as recently as the 70s and  80s. Protests are increasing and a bloody ‘Spanish spring’ isn’t as unthinkable due to massive unemployment and even hunger. 

As painful as the Argentinean default was and despite the corrupt politicians, the terrible financial policies, Argentina is now one of the fastest growing countries in the world. The countries that exit now could with tight European guidance, re-enter the monetary union (read: the euro). But only once they’ve demonstrated a sustained capability of satisfying the original requirements with regards to debt, exchange rate, inflation etc.

But.
‘But my bank has invested billions in Greece. It will collapse due if those countries default, creating a domino effect.’
Banks have weak financial buffers and multiple countries defaulting on their debts won’t help. But supporting banks that have a chance of surviving isn’t bad. For example: the Dutch government will make a nice profit on *all* their investments in bad banks.  Moreover how many European banks went bankrupt when the immensely important Argentinean economy collapsed? I can’t remember a single one.

‘But don’t banks deserve to go bankrupt? Isn’t this a case of private profits and socialized losses?’
Never let a crisis go to waste. With the government as a shareholder banks can be forced to address obscene salaries and irresponsible risk taking.

‘But going back to their previous currencies simply isn’t possible’
Why not? Most countries have their own currency. These countries had their own currencies before they entered the euro. It can be done.

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