BUST -- Greece, the Euro, and the Sovereign Debt Crisis: Book Excerpt

Excerpted with permission from the publisher, John Wiley & Sons, from BUST by Matthew Lynn. Copyright 2011 by Matthew Lynn.

By Matthew Lynn

Now We Are Ten

On January 13, 2009, Jean-Claude Trichet, president of theEuropean Central bank, traveled to the Strasbourg to givea lecture celebrating the tenth anniversary of the euro. It was apleasant, downbeat occasion. Over much of its short existence, Europe'ssingle currency had been a bitterly contested, viciously fought-overcreation.

Over prolonged European summits it had been argued oversavagely by a whole generation of political leaders. Careers had beenmade and broken. Referenda had been played out across Europe, and,as the votes were counted, the fate of the project regularly hung inthe balance. As preparations were made for its introduction, the globalfinancial markets poured endless buckets of scorn on its prospects forsuccess. As the notes and coins were introduced from Bavaria to Lombardy,from Catalonia to Provence, shopkeepers turned up their nosesat this strange, foreign money, a garishly colored imposter creepinginto their tills. And as it made its debut on the markets, it was treatedmuch as the new fat boy might be at a rough school: an object to bekicked around and bullied, mainly for the amusement of the biggerand nastier children.

And yet, even at the tender age of 10, it appeared to be approachinga kind of calm, middle-aged serenity. If it was possible for a currency topull on a cozy pair of slippers, make a cup of hot chocolate, pull itselfup by the fire, and start reading the gardening supplement in the newspaper,then that is what the euro would be doing. And that mood wasvery much reflected in the tone of Trichet's speech to the EuropeanParliament that afternoon.

"For decades, the single European currency was merely an ideashared by a few people. Many others said that it could not be done, orthat it was bound to fail," said Trichet.
Today, the single currency is a reality for 329 million citizens.The creation of the euro will one day be seen as a decisivestep on the long path toward an "ever closer union" amongthe people of Europe.Since the introduction of the euro, fellow Europeans haveenjoyed a level of price stability which previously had beenachieved in only a few of the euro area countries. This pricestability is a direct benefit to all citizens. It protects incomesand savings, and it helps to bring down borrowing costs, thuspromoting investment, job creation and prosperity over themedium and long term. The single currency has been a factorof dynamism for the European economy. It has enhancedprice transparency, increased trade, and promoted economicand financial integration within the euro area and with the restof the world.

Indeed so. Trichet is in many ways the perfect Mr. Euro. Asmooth, articulate French intellectual, he speaks with the calm authorityof a fiercely intelligent technocrat. You could interrogate the manfor weeks and not force him into a single error, slip, or gaffe. Over acareer spent pushing for the closer integration of the European nations,he sometimes appears to have transformed himself into a living embodimentof the ideals he strives to articulate: a kind of Franco-Germanunity turned, with surprising success, into flesh and bone.

Like allFrench political and intellectual leaders, his speeches and press conferencesare often elaborately erudite, laden with cultural, historical, andliterary references. In the manner that only French officials can achieve,he is never afraid to make the connections between poetry and centralbanking (Goethe and Dante turn out to be among the influenceson the European Central Bank's decisions on interest rates, in caseyou were wondering). But he has also assumed a Teutonic rectitudeand sternness. He is never shy about imposing a very German viewof financial conservatism on Europe. He discusses thrift and balancedbudgets as matters of morality as well as economics and bookkeeping,in a way that plays better in Bavaria or Saxony than it does anywhereelse in Europe. He is well aware that money is as much a matter ofnational identity as a medium of exchange, and perhaps more so. Theeuro could have no better champion.

In his lecture, he pointed to three key achievements of the firstdecade since the euro was introduced, first as a financial currency in1999 and then in the form of physical notes and coin in January 2002.First, it had overcome the credit crunch. Plenty of people hadbeen warning that the euro didn't have the strength to survive anykind of signifi cant shock to the global economy. And yet only a fewmonths earlier, following the collapse of the American investmentbank Lehman Brothers, the fi nancial system had gone into meltdown.Banks had been going bust all around the world. In the case of Iceland,a whole country had gone pop.

Trade had collapsed at a faster ratethan at any time since the Great Depression of the 1930s. The greatcontainer ships that sailed from Shanghai to Rotterdam laden with themass-produced consumer goods that were the physical manifestationof globalization were suddenly tethered empty to the docks. And yet,even though the ships were empty, the euro had sailed through thecrisis unscathed. Whatever the problems weighing down on the globaleconomy--and there were plenty of them, no question about that--no one was suggesting that the euro was one of them.

Next, the economic union that had been the primary goal ofthe euro had been summoned brilliantly to life. Price stability hadbeen achieved, and the economies of Europe had been drawn closertogether. Raw materials harvested in Sicily could be sent to theRhineland to be manufactured, then trucked to Burgenland in Austriaor to the Algarve in Portugal, for sale, and the goods could be paid for,accounted for, and taxed all in the same, uniform unit of money. Theresult was a Europe that was far more dynamic, more prosperous, moreopen, and more innovative, Trichet argued.

Finally, it was getting bigger all the time. Whereas its critics claimedthe euro would quickly collapse, and while the British, the Swedes,and the Danes snootily declined to take part at the beginning of thegrand experiment, fearing it was doomed to inevitable failure, insteadthis was turning into a club that everyone wanted to join. When theeuro was launched a decade ago, Trichet reminded his audience sharply,it had 11 members. As of the first of January 2009, it was the commoncurrency of 16 nations. If the natural impulse of any organism is to survive,replicate itself, and enlarge its territory, then the euro was by thatmeasure a triumphant success.

"Ladies and gentlemen, during its first years of existence, the eurohad to face major trials: the establishment of a sound and crediblecentral bank and the creation of a stable new currency inspiring confidence," he concluded with a flourish. "These challenges were overcomesuccessfully and the euro is today firmly established. Hence, thisis certainly a time for celebration."

On January 8, Trichet was singing from a similar hymn sheet, thistime at a ceremony to mark the arrival of Slovakia in the euro-zone.In Bratislava, the Slovakian capital, on January 8, the European CentralBank welcomed the second of the former Soviet bloc countries intothe club of nations that shared the single currency. It was, once again,a remarkable testament to the power of the euro.

Two decades earlier,Slovakia had been part of a communist empire that stretched from theborders of Austria and Germany all the way to Vladivostok in the FarEast. Now it was able to share its currency with the rest of WesternEurope. "Robert Schuman stated in his founding declaration thatEurope will be made through concrete achievements which create tangiblesolidarity among its people. European monetary union is a concreteachievement, and the euro is a tangible sign of solidarity amongits people," said Trichet in his remarks welcoming Slovakia into monetaryunion.

It was, in truth, a historic achievement, and one built against theodds. As it celebrated its tenth birthday, the euro could be celebratednot just with rhetoric, but with, just as Schuman demanded it shouldbe, tangible, demonstrable achievements.

"It is absolutely conceivable that the euro will replace the dollaras the reserve currency, or will be traded as an equally importantreserve currency," former chairman of the Federal Reserve, AlanGreenspan, told the German magazine Stern in 2007. According to astudy by Harvard University's Jeffrey Frankel and Menzie Chinn of theUniversity of Wisconsin for the U.S. National Bureau of EconomicResearch, the euro could surpass the dollar as the world's most importantcurrency by 2022. They looked at the way the dollar graduallyreplaced the British pound in the years before World War I and foundthat something very similar was happening right now.

The UnitedStates was declining in global importance, it was running an evermorereckless fiscal policy, and it was failing to hold the line against inflation.For all those reasons, the rest of the world would gradually despair ofholding dollars and start looking for a safer alternative.

As the years rolled by, and as the euro established itself more firmlyin the minds of investors, that view was gaining steadily in credibility.OPEC, the powerful cartel of oil producers, started to make noisesabout pricing oil in euros rather than dollars. The Chinese, who usethe vast trade surpluses run up by the country's exporters to accumulatemassive foreign exchange reserves, started to talk by the middle of2009 about holding more of their assets in euros rather than dollars.The Russians, whose oil reserves meant they were steadily building

up financial reserves in the same way the Chinese were, shifted someof their holdings out of the dollar and into the euro. Whichever wayyou looked at it, the European currency was gaining ground over theAmerican one.

Nor was that a mere matter of continental machismo (althoughthere would be plenty of politicians, particularly in Paris, who wouldregard every inch of territory the euro gained on the dollar as anotherstep forward for the forces of civilization against the forces of barbarism).There are huge economic advantages to having the world'sreserve currency. Right now, everyone has to hold dollars because thatis the money used for world trade. Every time people buy some ofthose dollars, they are, in effect, making an interest-free loan to theUnited States. Moreover, the government of the world's reserve currencyhas huge financial fi repower.

A U.S. Treasury bill is the benchmarksafe asset for the financial markets. When there is a crisis,everyone buys T-bills: It is the acme of safety. That makes it very easyand very cheap for the U.S. government to issue lots and lots of debtthat, in effect, the rest of the world has little choice but to buy. Reservecurrency status acts as a kind of tax the United States is allowed toimpose on the rest of the world. But if the euro could oust it from thatposition, then some of those benefits would accrue naturally to Europeand its citizens, rather than to the United Sates. It would be Frankfurtthat would tax the rest of the world, not Washington. Europeans wouldbecome richer, and Americans poorer, and, best of all, they wouldn'teven have to do any more work. It was a prize well worth striving for.

The growing importance of the euro in the capital markets,however, was only one component of the single currency's success.In plenty of other ways, the euro was doing well enough to makeits founders proud of their creation. Inflation was low and steadyright across the vast continental economy the euro now covered.Government bond markets functioned smoothly: Portugal could borrowmoney just as easily and almost as cheaply as the Netherlandsor Germany, despite the fact those countries had vastly better creditrecords. The capital markets functioned more smoothly.

Therewere signs that trade was increasing between countries as companiesno longer had to factor in the risk of the currency markets movingagainst them when they made goods in Eindhoven and sold them inTurin. What had started out as a great and risky experiment, and onethat plenty of people had predicted would collapse when it faced itsfirst real test, was turning into a huge success. By 2009, the euro wasbecoming boring, normal, a part of everyday life. It was part of theatmosphere, like the oxygen we breathe. It was just there. That waseverything its founders could have hoped for.

But, in truth, the tenth birthday party was premature in its toastsof success. That speech in Strasbourg was to be the last chance Trichetwould have to celebrate very much. Even as the words were delivered,a crisis was brewing that would, in the year that followed, threaten toblow the single currency to pieces.It would be a crisis that would expose the fl aws built into the veryfoundations of the euro itself.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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