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 the European Central bank, traveled to the Strasbourg to give a lecture celebrating the tenth anniversary of the euro. It was a pleasant, downbeat occasion. Over much of its short existence, Europe's single currency had been a bitterly contested, viciously fought-over creation.

Over prolonged European summits it had been argued over savagely by a whole generation of political leaders. Careers had been made and broken. Referenda had been played out across Europe, and, as the votes were counted, the fate of the project regularly hung in the balance. As preparations were made for its introduction, the global financial markets poured endless buckets of scorn on its prospects for success. As the notes and coins were introduced from Bavaria to Lombardy, from Catalonia to Provence, shopkeepers turned up their noses at this strange, foreign money, a garishly colored imposter creeping into their tills. And as it made its debut on the markets, it was treated much as the new fat boy might be at a rough school: an object to be kicked around and bullied, mainly for the amusement of the bigger and nastier children.

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

"For decades, the single European currency was merely an idea shared by a few people. Many others said that it could not be done, or that 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 decisive step on the long path toward an "ever closer union" among the people of Europe. Since the introduction of the euro, fellow Europeans have enjoyed a level of price stability which previously had been achieved in only a few of the euro area countries. This price stability is a direct benefit to all citizens. It protects incomes and savings, and it helps to bring down borrowing costs, thus promoting investment, job creation and prosperity over the medium and long term. The single currency has been a factor of dynamism for the European economy. It has enhanced price transparency, increased trade, and promoted economic and financial integration within the euro area and with the rest of the world.

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

Like all French political and intellectual leaders, his speeches and press conferences are often elaborately erudite, laden with cultural, historical, and literary references. In the manner that only French officials can achieve, he is never afraid to make the connections between poetry and central banking (Goethe and Dante turn out to be among the influences on the European Central Bank's decisions on interest rates, in case you were wondering). But he has also assumed a Teutonic rectitude and sternness. He is never shy about imposing a very German view of financial conservatism on Europe. He discusses thrift and balanced budgets as matters of morality as well as economics and bookkeeping, in a way that plays better in Bavaria or Saxony than it does anywhere else in Europe. He is well aware that money is as much a matter of national identity as a medium of exchange, and perhaps more so. The euro could have no better champion.

In his lecture, he pointed to three key achievements of the first decade since the euro was introduced, first as a financial currency in 1999 and then in the form of physical notes and coin in January 2002. First, it had overcome the credit crunch. Plenty of people had been warning that the euro didn't have the strength to survive any kind of signifi cant shock to the global economy. And yet only a few months earlier, following the collapse of the American investment bank 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 rate than at any time since the Great Depression of the 1930s. The great container ships that sailed from Shanghai to Rotterdam laden with the mass-produced consumer goods that were the physical manifestation of globalization were suddenly tethered empty to the docks. And yet, even though the ships were empty, the euro had sailed through the crisis unscathed. Whatever the problems weighing down on the global economy--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 of the euro had been summoned brilliantly to life. Price stability had been achieved, and the economies of Europe had been drawn closer together. Raw materials harvested in Sicily could be sent to the Rhineland to be manufactured, then trucked to Burgenland in Austria or 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. The result was a Europe that was far more dynamic, more prosperous, more open, and more innovative, Trichet argued.

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

"Ladies and gentlemen, during its first years of existence, the euro had to face major trials: the establishment of a sound and credible central bank and the creation of a stable new currency inspiring confi dence," he concluded with a flourish. "These challenges were overcome successfully and the euro is today firmly established. Hence, this is certainly a time for celebration."

On January 8, Trichet was singing from a similar hymn sheet, this time at a ceremony to mark the arrival of Slovakia in the euro-zone. In Bratislava, the Slovakian capital, on January 8, the European Central Bank welcomed the second of the former Soviet bloc countries into the 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 the borders of Austria and Germany all the way to Vladivostok in the Far East. Now it was able to share its currency with the rest of Western Europe. "Robert Schuman stated in his founding declaration that Europe will be made through concrete achievements which create tangible solidarity among its people. European monetary union is a concrete achievement, and the euro is a tangible sign of solidarity among its people," said Trichet in his remarks welcoming Slovakia into monetary union.

It was, in truth, a historic achievement, and one built against the odds. As it celebrated its tenth birthday, the euro could be celebrated not just with rhetoric, but with, just as Schuman demanded it should be, tangible, demonstrable achievements.

"It is absolutely conceivable that the euro will replace the dollar as the reserve currency, or will be traded as an equally important reserve currency," former chairman of the Federal Reserve, Alan Greenspan, told the German magazine Stern in 2007. According to a study by Harvard University's Jeffrey Frankel and Menzie Chinn of the University of Wisconsin for the U.S. National Bureau of Economic Research, the euro could surpass the dollar as the world's most important currency by 2022. They looked at the way the dollar gradually replaced the British pound in the years before World War I and found that something very similar was happening right now.

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

As the years rolled by, and as the euro established itself more firmly in the minds of investors, that view was gaining steadily in credibility. OPEC, the powerful cartel of oil producers, started to make noises about pricing oil in euros rather than dollars. The Chinese, who use the vast trade surpluses run up by the country's exporters to accumulate massive foreign exchange reserves, started to talk by the middle of 2009 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 some of their holdings out of the dollar and into the euro. Whichever way you looked at it, the European currency was gaining ground over the American one.

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

A U.S. Treasury bill is the benchmark safe asset for the financial markets. When there is a crisis, everyone buys T-bills: It is the acme of safety. That makes it very easy and very cheap for the U.S. government to issue lots and lots of debt that, in effect, the rest of the world has little choice but to buy. Reserve currency status acts as a kind of tax the United States is allowed to impose on the rest of the world. But if the euro could oust it from that position, then some of those benefits would accrue naturally to Europe and its citizens, rather than to the United Sates. It would be Frankfurt that would tax the rest of the world, not Washington. Europeans would become richer, and Americans poorer, and, best of all, they wouldn't even 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 make its founders proud of their creation. Inflation was low and steady right across the vast continental economy the euro now covered. Government bond markets functioned smoothly: Portugal could borrow money just as easily and almost as cheaply as the Netherlands or Germany, despite the fact those countries had vastly better credit records. The capital markets functioned more smoothly.

There were signs that trade was increasing between countries as companies no longer had to factor in the risk of the currency markets moving against them when they made goods in Eindhoven and sold them in Turin. What had started out as a great and risky experiment, and one that plenty of people had predicted would collapse when it faced its first real test, was turning into a huge success. By 2009, the euro was becoming boring, normal, a part of everyday life. It was part of the atmosphere, like the oxygen we breathe. It was just there. That was everything its founders could have hoped for.

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