The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) --Monnet's original conception for the European Common Market sounded sensible. As separate nations, we have little power, but together, we will be a significant global/political force. However, as is often the case, the devil is in the details. The eurozone, with a single central bank and currency, is a subset of the European Common Market conception. It is not working out for at least four of its 17 members. The euro leaders are currently engaged in a dance that will ultimately mean nothing. In the first part of this two-part series, I will explain why. In the next piece, I will get into the details of how these four countries can and should leave.
The ProblemBecause the European Central Bank (ECB) issues the currency and sets interest rates, the individual eurozone nations have no control over monetary policy. If laborers migrated between countries, this would be a manageable problem. With migration, unemployment and other economic imbalances could be worked out. But because of language and cultural differences, there is little migration between eurozone countries. So huge economic imbalances exist, and there is no effective equilibrating force. Consider first unemployment rates. The rates in the eurozone powerhouses (Austria, the Netherlands, and Germany) are low. But look at the bottom four. These rates have been high for some time, and such high rates cause serious socio-economic problems. Spain's unemployment rate of 19.4% is particularly grim. It means that one in five Spaniards looking for jobs. The OECD reports that for men in the 15-24 age range, the unemployment rate is 43%! This is not healthy. It invites civil strife.
Root of the ProblemWhat is really wrong here? Labor costs in "weak sister" countries are too high to clear labor markets. More specifically, the euro is too strong for these countries. It makes their imports too cheap and exports too expensive to reduce trade deficits and increase domestic employment. This is a classic case of the "Dutch Disease," a term coined to explain why other industries do poorly in mineral exporting countries. In the eurozone, Austria, Germany, and the Netherlands are the "mineral export industry": the euro is quite strong because of them. But other euro members will not fare well because the strong euro makes them too costly to compete on world markets. Now in theory, this problem could be resolved if the "weak sisters"' producers (capitalists and laborers) got together and agreed to reduce their euro costs by 30%. In other words, if they all agreed to take a pay cut of 30%. But this will never happen.
What Should Be DoneHow can the "weak sisters'" costs be realistically reduced so that their workers can find jobs again and their trade deficits become manageable via lower imports and higher exports? They should leave the eurozone and go back to having their own central banks. Why would this help? Because with their own currencies and central banks, their currency exchange rates would fall so their labor would be cheaper and they could compete again on world markets. And instead of having to reduce their government deficits as they are obliged to do under ECB/IMF mandates, they can launch new stimulus packages to get people back to work. These stimulus packages would be financed by their central banks buying up the increased government deficits. Of course, this is just another way to get labor and capital costs down in the "weak sister countries." With their new currencies, their imports will be much more expensive and their exports more competitive than under the euro regime. But this is a workable way to reduce their costs. And yes, their standard of living will fall by 30%, but it has to if they want to put people back to work. This might sound grim, but what is the alternative?
- Stay in the eurozone, and get the French and German governments, working on behalf of their banks, to squeeze all they can out of the "weak sisters";
- Watch unemployment rates continue to rise with accompanying civil disorder/riots becoming more intense;
- Watch the leaders of the "weak sisters" commit political suicide by continuing to support the ECB/IMF mandates.