Dince it was put into circulation in its fiduciary form in 2002, the Euro has always claimed the status of an alternative, or at least a direct competitor to the American Dollar. Anchored in a powerful, innovative and prosperous economy, that of the European Union, the Euro seemed to have every chance of succeeding, except for a certain number of insurmountable obstacles. The first being the absence of political unity. Because yes, for centuries and centuries, the currency is Caesar, in other words the State.
The name “currency” literally refers to the currency of a state and nation. Namely, the founding and unifying values of the latter. The coin or the banknote served as a sort of state visiting card internationally. One could, just by looking at a banknote, know who was the Head of State, the nature of the political system, the fundamental values of the country, the type of architecture through the monuments represented,… In the case of the Euro , all these elements are missing. There is neither European State, nor Head of State therefore, nor secular values, nor civilizational identity, knowing that all the monuments represented on the Euro banknotes are fictitious, although inspired by real monuments. The second obstacle is that of disparities in development between the different EU Member States.
Before the creation of the Euro, most countries in the South repeatedly resorted to currency devaluations to gain in competitiveness, faced with an unbeatable German economy in terms of industrial competitiveness. Italy, but also France, although possessing a powerful and modern productive apparatus, could only compete with its German neighbor by resorting to this lever. However, the establishment of the common currency was in fact an extension of the Deutsche Mark which does not say its name. For Germany, nothing changes, but for the peripheral countries, they found themselves with an overvalued currency in relation to their economic power, and over which they now have no control. The exchange rate regime of the Euro is floating, and the National Central Banks have literally become branches of the ECB whose headquarters are conveniently located in Frankfurt, Germany.
Finished the monetary devaluations and place henceforth in the fight of all against all inside the European arena. Deprived of devaluation and any form of protectionism, the European economies of the South will gradually turn into Germany’s preserve. Before the COVID crisis, around 80% of German exports were made within the Euro zone… Then came the 2008 crisis, followed by the sovereign debt crisis of 2012. The two having close ties, knowing that the solutions brought to the first caused the misfortunes of the second. A brief reminder of the facts. The 2007-2008 crisis was financial, then economic. At the time, the urgency was to recapitalize the banking system in order to avoid its bankruptcy. To do this, the central banks (FED and ECB in the lead) decided to recapitalize the banks by injecting hundreds of billions of dollars and euros into the financial system, by buying up all the rotten assets held by the banks. , and lowering key interest rates to zero.
Quantitative monetary policies that can only ultimately depreciate the value of the currency (monetary inflation). This situation of excess liquidity generated vast speculative movements, as much on the commodity and food markets as on those of sovereign debts. Italian and Greek debt exploded and interest rates became unsustainable. Two solutions imposed themselves. Either Greece and Italy leave the Euro and the European Union, thus threatening to break up the Union and put the Euro to death, or the ECB decides to save the Euro at all costs, even if it means leaving of its orthodoxy and Sovietize the debt market. It is the second that was retained with the famous sentence pronounced in July 2012 by Mario Draghi, the former President of the ECB: «Whintin our mandate, the ECB is ready to do whatever it takes to préserve the euro» / “Under our mandate, the ECB is ready to do whatever it takes to preserve the Euro”.
In September 2012, Draghi launched an unlimited plan to buy back the debt of countries in the Euro zone, now unable to finance themselves on the market due to soaring interest rates. The currency is no longer at the service of the economy, it is now the opposite. And if I speak of sovietization, it is because the ECB has decided that the rates will no longer be formed by the market, but decreed by the Central Bank. The aim was, firstly, to avoid Greece and Italy defaulting on payments, but also to maintain the stable and low spreads between Italian and German rates. This debt buyback operation gave rise to a colossal monetary creation, again with a long-term impact, a depreciation of the value of the Euro. Finally, the COVID-19 crisis completes this monetary headlong rush.
To avoid a collapse of the real economy and a surge in sovereign debt rates, the ECB decides to accelerate the dynamic of buying back government bonds, in order to allow the various governments to put in place support policies for businesses and households, and subsequently stimulus policies. Thus, between 2019 and 2020, the growth rate of the money supply increased from 5 to 12%. This progression is the fastest and most important since the creation of the Euro. In the United States, over the same period, the money supply grew by 25%! To believe that this will not ultimately generate inflation, or even hyperinflation, is sheer madness. Especially since opposite, the European economies have emerged bloodless from the various containment policies.
A situation exacerbated by the disorganization of supply chains on a global scale and the additional costs of freight transport. Result of the races: creeping inflation begins to settle in Europe, in the United States, then more and more around the world from the beginning of 2021, before being exacerbated from February 2022 by the conflict in Ukraine, which was only a simple catalyst. But unlike 2012, when European sovereign debt was already very high, in 2022 it has reached levels that are simply unsustainable in the long term. For example, Italian debt has gone from 126% of GDP in 2012 to 150% in 2022. In France, it has gone from 90 to around 115% in 2022.
All this in a context of global economic recession, inflation totally out of control, an unprecedented energy crisis, a Euro which is plummeting against the Dollar (parity has now been reached for the first time in 20 years) and of an ECB faced with a difficult choice: save the Euro by significantly raising the key rates, at the risk of causing a surge in rates on the Italian debt, or save the debts of the countries of the South by maintaining a low key rate and by massively buying government bonds, at the risk of losing the Euro, which risks breaking parity against the Dollar, and literally collapsing.
A not too distant future will tell us
The problem is that as nothing is planned in the statutes to allow a State to leave the Euro, the only way to achieve this is to leave the EU. This is perhaps a historic opportunity to rethink a new Europe, more respectful of the sovereignty of the Member States, more strategically autonomous vis-à-vis the United States, more realistic economically, and above all more democratic.
By Rachid Achachi, columnist, CEO of Arkhé Consulting