Euro may survive one default but not the next

PUBLISHED : Friday, 30 September, 2011, 12:00am
UPDATED : Friday, 30 September, 2011, 12:00am


Few things are as galling as being right too soon. Back in 1970, dissident Soviet writer Andrei Amalrik wrote a book boldly called Will the Soviet Union Survive Until 1984? He predicted that it would not, which greatly annoyed the communist regime. He was sent to Siberia for his temerity, and later forced to leave Russia for the West. Even worse, he was wrong. The Soviet Union survived until 1991.

Many pundits find themselves in the same situation today with regard to the euro. They say it could collapse any day now, and that the European Union itself may follow. Making blood-curdling predictions is great fun, but they are getting ahead of themselves.

We are dealing with three different things here. One is a default by Greece. That could happen any day now. The second is a collapse of the euro, triggered by a Greek default. That would plunge Europe back into recession, and cause chaos in the financial markets. The third is the collapse of the EU itself. This, we are told, would cause it to rain blood, or at least frogs, all over Europe.

So, let's begin with Greece. Why should it default on its international debts? Because they amount to 160 per cent of Greece's gross domestic product, and the savage austerity measures that the EU has forced on the country have driven its economy deep into recession. The Greek economy is shrinking at 7 per cent a year - so Athens can never repay the debt.

However, Greece uses the euro. Wouldn't a Greek default bring the whole common currency into disrepute? Well, maybe, but that's certainly not inevitable. The euro is the root cause of Greece's difficulties. It has an uncompetitive economy, so back when it used the drachma, it paid high rates for foreign loans, and devalued the drachma once in a while to deal with the competitiveness problem. Greece should never have been allowed to join the euro. When it was allowed in, it found it could borrow money at the same rate as Germany. So it borrowed a lot.

The euro will probably survive this crisis. But it probably won't survive more than another five to 10 years, because much bigger countries - notably Italy, perhaps Spain - have a problematic relationship with the euro too.

A common currency generally presupposes a single government with the fiscal and monetary tools to protect it, and the political unity to do so. The euro was created without any of those fundamental assets. In its current form, it will probably collapse before 2020.

Will the EU collapse with it? Why should it? It has been in existence, under various names, since 1958. It survived all but the last 10 years without a common currency because its existence served the purposes of its members. It will survive a future without the euro, too.

Gwynne Dyer is a London-based independent journalist