Czech Republic President says 'The Euro Zone Has Failed'

Has the Euro Zone "project" been a success or a failure? V�clav Klaus, president of Czech Republic makes a solid case 'The Euro Zone Has Failed'

As a long-standing critic of the idea of a European single currency, I have not rejoiced at the current problems in the euro zone because their consequences could be serious for all of us in Europe�for members and non-members of the euro zone, for its supporters and opponents. Even the enthusiastic propagandists of the euro suddenly speak about the potential collapse of the whole project now, and it is us critics who say we have to look at it in a more structured way.

Extensive studies published prior to the launch of the European single currency promised that the euro would help to accelerate economic growth and reduce inflation and stressed, in particular, that the member states of the euro zone would be protected against all kinds of external economic disruptions (the so-called exogenous shocks).

This has not happened. Economic growth in Europe has been slowing down since the 1960s, thanks to the increasingly damaging economic and social system which started dominating Europe at that time.

The European "soziale Marktwirtschaft" is an unproductive variant of a welfare state, of state paternalism, of "leisure" society, of high taxes and low motivation to work. The existence of the euro has not reversed that trend. According to the European Central Bank, the average annual rate of growth in the euro-zone countries was 3.4% in the 1970s, 2.4% in the 1980s, 2.2% in the 1990s and only 1.1% from 2001 to 2009 (the decade of the euro). A similar slowdown has not occurred anywhere else in the world (speaking about "normal" countries, e.g. countries without wars or revolutions).

Not even the expected convergence of inflation rates has taken place. Two distinct groups have formed within the euro zone�one (including most of the countries of western and northern Europe) with a low inflation rate and one (including Greece, Spain, Portugal and Ireland) with a higher inflation rate. We have also seen an increase in long-term trade imbalances. There are countries where exports exceed imports and countries that lastingly import more than they export. It is no coincidence that the latter countries also have higher inflation. It has no connection with the world-wide crisis. This crisis "only" escalated and exposed longtime hidden economic problems; it did not cause them.

Even Otmar Issing, the former member of the Executive Board and chief economist of the European Central Bank, has repeatedly pointed out (most recently in a speech in Prague in December 2009) that the establishment of the euro zone was primarily a political, not an economic, decision. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.

It is evident that the euro�the European single currency�and the currently proposed measures to save the euro do not represent any "salvation" for the European economy. In the long run, it can be saved only by a radical restructuring of the European economic and social system.

The Czech Republic has not made a mistake by avoiding the membership in the euro zone. I am glad we are not the only country taking that view.

That is a lengthy snip from a lengthy, extremely well written article. Inquiring minds will give the article a closer look.

I am inclined to agree with everything V�clav Klaus said. Here are the main points.

V�clav Klaus: The European "soziale Marktwirtschaft" is an unproductive variant of a welfare state, of state paternalism, of "leisure" society, of high taxes and low motivation to work.

Mish: We have the same problem in the US. Unfortunately President Obama has embraced the welfare state led by his support of public unions. How dense can one be to not see that Greece has failed?

The ECB kicked the can down the road. Now it's a far bigger can. For more on this line of thinking please see France Worries About AAA Rating; UK Economists Urge Greece to Abandon Euro; Spanish Prime Minister Losing Support

President Obama seems hell bent on insuring the US becomes the next Greece. Hopefully the next Congress puts an end to it.

V�clav Klaus: The establishment of the euro zone was primarily a political, not an economic, decision. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.

Mish: Actually the Euro came about as a result of a currency union, not a political union. However, the decision was certainly political in nature. Politicians are always looking for the proverbial free lunch. There is no such thing. While the politicians in every European country were in favor of it, the general population was not.

The result is a "union" of sorts that favors exporters like Germany over the importers like Greece and Spain. In the end, the whole mess will collapse. The cost of a Spanish bailout will be much greater than Greece. The real fireworks have yet to begin.

In contrast, the US has a genuine political union, but the same stupid mentality of bailing out failed banks, failed insurers, failed automotive companies, and failed pension plans.

Everything is done to protect the banks and the wealthy in the US just as it is in Europe.

V�clav Klaus: The Czech Republic has not made a mistake by avoiding the membership in the euro zone.

Mish: I concur. Moreover, the UK avoided a mistake as well. Certainly the UK has massive problems. Fortunately for Britain, the Euro isn't one of them.

V�clav Klaus: Europe will have to decide whether to centralize itself politically as well. Europeans don't want that because they know (or at least feel) that it would be to the detriment of liberty and prosperity. There is, however, a real danger that the politicians will do it anyway�behind the backs of those who elected them. The recent dealings in EU headquarters in Brussels�literally behind closed doors�about the aid package for Greece demonstrated that there is no democracy there. The German-French tandem made the decision on behalf of the rest of the euro-zone countries, and I am afraid this will continue.

Mish: The entire bailout scheme was meant to protect German and Especially French banks. For more details, please see Euro Bailout Plan is all about Rescuing Banks and Rich Greeks.

V�clav Klaus: So much political capital had been invested in its [the Euro's] existence and in its role as a "cement" that binds the EU on its way to supra-nationality that in the foreseeable future the euro will surely not be abandoned. It will continue, but at a very high price�low economic growth. It will bring economic losses even to non-members of the euro zone, like the Czech Republic.

Mish: Agreed. The Euro itself will survive. How many countries are in the Eurozone is the question in debate. The more countries that remain in the Eurozone, the bigger the price.

V�clav Klaus: It is evident that the euro�the European single currency�and the currently proposed measures to save the euro do not represent any "salvation" for the European economy. In the long run, it can be saved only by a radical restructuring of the European economic and social system.

Mish: I could not possibly agree more. Please send a message to President Obama that the US needs a radical restructuring as well. The best way is in the next election. Please throw the bums out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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