November 2016        

Impending collapse of the euro “house of cards”

Tommy McKearney

Almost no free-market economist predicted the financial crash of 2008. When Lehman Brothers collapsed, stock markets around the world panicked; even the White House feared that the free-market system itself was in danger of imploding.
     Amazingly, practically no noted capitalist commentator had even considered the possibility of this type of crisis. Confidence in the system was so deep-rooted in the year before the crisis that the then leader of Fianna Fáil, Bertie Ahern, told the ICTU annual conference in 2007 that he couldn’t understand why those doubting the economy’s robustness didn’t commit suicide. While he was properly criticised for an uncouth comment, every other government in the European Union, and especially within the euro zone, shared his faith in the markets.
     No such belief is abroad today; nor is there any justification for believing that the euro zone is in anything other than a perilous state. Some of the most prominent and influential figures of the capitalist financial world have actually predicted its demise.
     Mervyn King, former governor of the Bank of England, wrote last February about the probable break-up of the euro in his book The End of Alchemy: The Global Economy and the Future of Money.¹ The reasoning behind his forecast was interesting and might well have appeared in any left-wing journal. He said: “. . . if the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then leaving the euro area may be the only way to plot a route back to economic growth and full employment.”
     Should our readers think the former governor is just a crusty old banker pumping out his own version of the Tory Brexit line and therefore irrelevant, they might reflect on the view of Prof. Otmar Issing. The professor was the first chief economist of the EU Central Bank and is widely recognised as a major figure in the construction of the single currency. In an interview last month with the influential publication Central Banking he told the journalist Chris Jeffery that “muddling from one crisis to another cannot go on endlessly and that the Euro ‘house of cards’ is set to collapse.”²
     Where Otmar Issing differs from Mervyn King in these remarks is informative. While the former governor of the Bank of England has identified a series of issues detrimental to the well-being of the greater number of working people, the German economist instead offered a harsh neo-liberal analysis. He said: “The Stability and Growth Pact has more or less failed. Market discipline is done away with by ECB interventions.” He added that “there is no fiscal control mechanism from markets or politics. This has all the elements to bring disaster for monetary union.”
     Ominously, Prof. Issing also said there would be no escape from the euro’s problems without a political union—a United States of Europe—though he did say in his interview that he believes this is unlikely to happen.
     Whatever the professor’s personal view on the likelihood of a political union, it is very probable that his belief in its desirability is shared by other powerful influences within the EU elite. These elements may be reluctant to press ahead too fast, but that doesn’t mean it is not their intention.
     Something worth bearing in mind is that the most powerful influence within the European Union, Germany, emerged as a unified state in the second half of the nineteenth century, in no small measure as the result of a customs union, the Zollverein. It is not unreasonable to believe, therefore, that leading German politicians are at least aware of a project in their own history that resembles the contemporary organisation managed from Brussels, and that their thinking must surely be influenced by it.
     In the light of all this, it is fair to say that the euro zone faces either an unplanned, disorderly (and therefore damaging) collapse or else a powerful German-led drive towards political integration, in order to preserve the single currency. It is impossible to say exactly when such a situation may occur, but periodic crises are inherent within capitalism, and history teaches us that they are also inevitable. An implosion of the Chinese debt overhang, an Italian banking meltdown³ and the repercussions on global stock exchanges of a forced repatriation of transnational profits are all potential triggers, not impossible to imagine, that might precipitate just such a crisis.
     The detrimental impact on Ireland in such a situation would be impossible to overestimate. In the first instance, Ireland’s export-led economy would suffer from the inevitable contraction in overseas orders that follows in the wake of a global recession. If that difficulty were to be compounded by a euro crisis, this country’s options would lie between very bad and even worse.
     Trying to float a new currency in the midst of a worldwide economic and financial meltdown would cause unimaginable difficulty and hardship, involving galloping inflation, a collapse in the value of domestic savings, and mass unemployment. Alternatively (and the option most likely to be followed by our current coalition), the Republic’s government would have to go along with the certainty of a demand by the EU Commission for greatly enhanced political integration. This option would not only deprive the Irish people of their remaining sovereignty but would also make the country a marginalised region on the periphery of the European continent, enjoying little influence and fewer prospects.
     The question arises as to what should be done to lessen the impact of such an eventuality. For a start, it is important to rule out the type of response resorted to by both the Fianna Fáil and coalition governments in the aftermath of the 2010 crisis. Instead of craven compliance with edicts from Brussels and the IMF, the Republic should announce its intention to take control of its economy, abandon the euro, and re-establish its own currency. There would be some initial turbulence, but this would be offset before long by having a currency compatible with the needs of the Irish economy rather than those of Germany and the Netherlands.
     Overwhelmingly, though, the focus should be kept on the larger picture outlined above, where the situation would once again be dictated entirely by external events not of our making and certainly not to our liking. As in the past, it would be working people who would pay for the fiasco, both in the short and the longer term, unless there is a managed disengagement from the euro zone.
     Surely there cannot be a repeat of the situation that has taken place over the past six years, with the Irish working class being forced to pay for bankers’ gambling debts. What has to be said is that on this occasion, unlike the previous crisis, there is clear and unambiguous notice of an impending threat. The message is coming from, among others, the most senior of capitalist finance gurus, and for once they are right.
     Spread the word. You have been warned.

1. Chris Giles, “Former head of the Bank of England King predicts collapse of the Eurozone,” Financial Times, 29 February 2016.
2. Christopher Jeffery, “Otmar Issing on why the euro ‘house of cards’ is set to collapse,” Central Banking, 13 October 2016.
3. The Financial Times reported on 26 October 2016 that the Bank of England has asked large British lenders to provide details of their current exposure to Deutsche Bank and some of the biggest Italian banks, including Monte dei Paschi, amid mounting market jitters over the health of Europe’s financial sector.

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