By Walter Russell Mead
What does it mean for the euro that, on paper at least, Spaniards,
Italians, and Cypriots are much wealthier on average than Germans?
That’s the question Wolfgang Münchau tackled in a must-read column in the Financial Times, and it’s one that VM readers would do well to spend some time thinking through.
Here are the outlines of his argument. A new survey by the European
Central Bank has concluded that median German household wealth ranks
among the lowest in the entire Eurozone. The median German family is
worth €51,000 whereas the median Cypriot household is worth €267,000.
Those are eye-popping figures, and the German press is apoplectic over
them. Münchau cautions that the median is not the best measure in this
case. But even if one were to look at the mean, Germans are
worth €200,000 per household, while Spanish net wealth is somewhere
around €300,000. There’s another correction to take on board; Germans
haven’t bought into home ownership the way many Europeans (and
Americans) do. But put in all the caveats and corrections you want, and
the numbers are still striking and, to many Germans, infuriating. Why
should German households be paying tax money to bail out rich Cypriots?
But anybody who’s traveled in Europe understands that these numbers
have something wrong with them. Germans are significantly richer than
Italians and Greeks. The answer, says Münchau, must be that varying
price levels across the eurozone are responsible.
On the surface, this is not actually as bizarre as it might seem.
Price levels vary. The American experience with the dollar is not
totally different. A dollar in New York isn’t the same thing as a dollar
in other parts of the country. A salary of $150,000 in Manhattan is
worth a lot less than a salary of $150,000 in Omaha or Baton Rouge. And
while $500,000 can’t buy you a decent sized apartment in Manhattan, it
can buy quite a nice house in much of the country. European countries
work like this, too. Milan is a lot more expensive than most of the rest
of Italy, for example.
But there is a perverse European twist to this state of affairs. In
America, it’s the richer parts of the country that have the highest
price levels. But in Europe it’s the other way round. Prosperous Germany
has lower prices than the dead broke Club Med countries. In American
terms, imagine that real estate in Manhattan was cheaper than in
Detroit, or that prices in Buffalo, New York, far outstripped prices in
Silicon Valley.
There are two ways to solve this problem within the eurozone: Germany
can let its prices inflate to match Club Med levels, or the Club Med
countries can deflate to match German prices. But the first option is
closed: since the Germans are dead set against inflation, prices in the
south will have to come down.
They will have to come down a lot. For the eurozone to survive as it
now stands, house prices, wages, the cost of meals in restaurants,
groceries, and so on would all have to fall by as much as 50 percent in
the periphery. That can’t happen without massive losses to banks, which
have lent money based on current price levels. These loans cannot be
repaid if prices fall that far. And this kind of price adjustment also
means massive unemployment, probably dragging on for many years.
As Münchau points out, this situation means that Europe’s single
currency has in effect already failed. €300,000 in Germany is not the
same as €300,000 in Italy or Spain, and there is no way to equalize
values without years of wretched and ruinous pain.
There are lots of consequences, but the one that may cause the most
trouble fastest has to do with banking. If a Spanish euro is really
worth much less than a German euro, sooner or later bank deposits in
Spain are going to be worth less than bank deposits in
Germany. Intelligent people will realize this and start moving their
bank deposits out of Spanish banks and into German or even non-eurozone
banks; those who fail to do this stand to lose a lot of money when the
system finally snaps. Stupid people (some of whom may be operating
central banks) will increasingly be the ones whose bank deposits keep
the south European bank systems functioning, and there are probably not
enough of them to keep the system running indefinitely.
We have no way of knowing how this all ends. One problem is that the
smartest solution—having Germany and perhaps a handful of other northern
countries leave the euro for a new currency (the Deutche Mark 2.0, or a
“neuro” for northern Europe)—would make life easier in the south. The
south based euro would fall in value, but since debts and contracts are
denominated in that currency, the adjustment would be the same as in a
normal devaluation. This course would likely lead quickly to a new burst
of growth in the south, though inflation and other problems would take a
toll over time.
But the euro’s break up day would cause a lot of problems for Germany
and its northern friends. First, the new currency would rapidly
appreciate, killing their export markets. Second, all the assets their
banks and companies held in the south (loans, etc.) would suddenly be
worth much less. This would quickly create a major and expensive banking
crisis in the north. The resulting bailout might well bring the neuro
back to earth for a while, helping exporters, but it would be an ugly
and expensive mess and the German government would end up with a large
pile of new debt.
So we’re in an interesting situation. The crisis is crippling the
south, but the south has no power to resolve the crisis. The crisis
isn’t comfortable for the north but still looks less painful than the
solution. So the north, which has the ability to resolve the crisis,
doesn’t have the will to do it and the south, which has the will, lacks
the ability.
And meanwhile everything in Europe gets worse. As we’ve said before,
with the exception of communism itself, the euro has been the biggest
economic catastrophe to befall the continent (and the world) since the
1930s. Politicians in Europe thought they were living in a
post-historical period in which mistakes didn’t really matter all that
much. They were horribly wrong, and the wreck of the euro is blighting
lives and embittering spirits on a truly staggering scale.
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