Why we think the Euro will fail? (Part 1 of 3)

In 1998, I wrote an article at Invesco that stated the Euro would fail. At that time, the statement seemed bold and certainly out of the mainstream. Even in 2007 these statements seemed a bit far fetched. Today, however, it is main stream to think the Euro experiment will unravel. In March of 2012, I think it was Soros who predicted that the currency union had three months to get its act together, or the union would fold. Today, I would like to take a few steps back and review why I thought the Union was doomed. Then in my next blog, I will take a few steps into the future and answer the question can the Euro Survive?

Our original thought was that it is difficult, if not impossible, to have a monetary union without a fiscal and political union. In simple terms, if one country went on a spending binge, there was no way for the other countries to stop it. Secondly, the fiscally austere would be loath to bailout the fiscally irresponsible. Sound familiar?

The other reasons we felt the union would fail was because of the differing cultures. In the US, we have a common language, culture, and similar educational systems. If one region of the country is lagging from an employment perspective; workers can more easily migrate to the more prosperous and productive regions. Not so in Europe due to language and cultural barriers. Further, if New York is booming but Texas is lagging from an employment standpoint, because of the fiscal authority of the US Government, programs are and can be put in place to shore up employment in lagging areas. In European terms this means wealth needs to be transferred from Germany to the PIGS, Portugal, Italy, Greece, and Spain. Because Germany wants to maintain its financial prowess, there is a limit on the amount of wealth they are willing to transfer. Without a central government the Germans will only provide enough support to keep the crisis from becoming full blown. However, they are not willing to provide enough to solve the problem. In the end, this will create a massive divide between countries and the mistrust on both sides will continue to grow.

France wanted the Euro to contain Germany and to stop of the cycle of wars across the region. What they have created is an environment where Germany will continue to flourish at the expense of its Southern brethren. This does not sound like a pathway to unity.


The other, primary reason we thought the Euro would fail is that separate governments can vote whether to stay in or go out of the union. If the relative competitiveness’ of one country lags another over time, they would have three options to solve the problem: lower wage cost, increase productivity, or devalue their currency. The last option is not available to the euro zone countries. Since the Euro’s inception, Germany’s industrial productivity has outstripped the productivity in the more agrarian economies of Spain, Greece and Portugal. Because Germany is more industrial, its workers tend to add more value per unit of output. Thus after 13 years, Germany’s export economy is running large surpluses relative to the rest of the EU. It will take years of pain for labor cost across the Euro to adjust, and it was our belief that sovereign nations would ultimately vote to leave the union in order to restore competitiveness. An agrarian economy is not going to have the same productivity of a high value-added, industrial society. Thus, in my opinion it was never logical to link them under a common currency.

This premise is not only true, but it is growing truer by the day. By keeping a lid on its labor cost, Germany’s exports have become more and more competitive. But the increase has come at the expense of market share of other European nations. This trend is not ending, nor is it going to end. The Germans are keenly aware of this competitive advantage and will strive to maintain it. In the end, the increase in German power and dominance will lead to the failure.