Why has the Euro crisis lasted so long? And why have European policymakers allowed unemployment to skyrocket?
In this guest post, author of Fall of the Euro Jens Nordvig sheds some light on this complex situation. Nordvig is also the Managing Director, Head of Fixed Income Research, Americas and Global Head of Currency Strategy at Nomura, the global investment bank.
You cannot understand the Euro without understanding its history. The Euro was born from a political ambition of European integration. Economics played only a secondary role in the process. This is ironic, since giving up your currency is one of the most important macroeconomic decisions a country can make.
There is no political union binding the Eurozone together. Decisions have to be made through compromise between 17 independent countries. It is an inefficient and slow process. The lack of political union is a severe constraint on the ability to effectively fight economic and financial crisis. This leaves crisis-hit Eurozone countries stuck with costly deflation. This type of adjustment is similar to that experienced during the gold standard decades ago. The economic pain associated with deflationary adjustment fuels political tension that could sow the seeds for future crisis.
The alternative to further integration is a form of breakup of the Euro. If countries cannot agree on a common path, the logical consequence is to move back to independent economic policies, including independent currencies. The topic of breakup is complex and not well understood. There are plenty of myths to dispel.
The original Euro has fallen. A new version of the Euro is under construction. European officials like to call it EMU 2.0. But it is not finished yet, and it is too early to tell for sure which form it will ultimately take, and whether it can survive the current economic and social crisis.
The fate of Europe and the trajectory of global financial markets are crucially dependent on how the Euro evolves from here. Will it be a strong currency? Will it be a weak currency? Or will the currency break into to pieces?
How the current deadlock is broken will shape the future of the Euro, impact the lives of millions of European citizens, and drive the performance of many different financial assets around the world.