Kozlowski: Concerns for the euro

By Mark Kozlowski

If your house were to catch fire, you would hope that somebody would be there to put it out. But… If your house were to catch fire, you would hope that somebody would be there to put it out. But let’s say that before the fire brigade agrees to provide its services, it applies all sorts of conditions: every time you want to have a candlelit dinner, you can only do so with the permission and strict supervision of the firehouse. Whenever you hold a party, you have to charge people to come in. Your first child must be named Dweezil Moon Unit, and your second child Ethelred Hoobert Heever, regardless of gender. You’d likely get all huffy about your sovereignty.

Well, the Republic of Ireland is getting huffy about its sovereignty right as it is facing a serious economic conflagration. Irish banks were apparently just as bad at making loans as American banks and were also very good at getting credit from foreign countries in the eurozone and elsewhere. If the Irish banks collapse, they might take down a lot of other institutions with them. The Irish government has tried to intervene with a TARP-like program, or “tarpóil” if you will, but unfortunately not only were the Irish banks too big to fail, they were too big to bail out. The Irish budget deficit is expected to reach 32 percent of gross domestic product. That’s just the deficit, not the entire budget. This is a big, scary number to a lot of investors, who wonder if they’ll get their money back. So, something worse than a bank collapse is in the cards — a collapse of the entire fiscal situation of the government.

The European Union — with a hearty “Faugh a Ballagh!” — has essentially forced Ireland to take an EU bailout that will likely involve the IMF as well. As a condition of this bailout, the EU is likely to demand that Ireland meet certain stipulations — most controversially, that it raise its ultra-low 12.5 percent corporate tax rate that many saw as key to the success of the “Celtic Tiger” years.

Of course, this is an unfortunate Act II of what started as a Greek tragedy this summer, with Greece in hock up to its eyeballs. Now, worries are mounting because we don’t know how many acts there are in this play. Act III might be investors fleeing Portugal, Act IV might be running away from Pamplona and anything else having to do with Spain, Act V might be a similar run fromItaly. A failed debt auction in Spain would be almost too large for the EU to handle. Serious concerns are being expressed about the euro, and it is doubtful that it can survive as a single currency in its present form.

The Germans and the French are already quite grumpy about having bailed out Greece, especially because the Germans have prided themselves on fiscal sanity. If more bailouts are required, the German people might put increasing pressure on the German government to reevaluate use of the euro. If the eurozone loses Germany, the game’s up, as Germany is the eurozone’s largest economy and thus its most relevant member. The euro might be consigned to irrelevance. This would suck, but at least the “mark” would be back in circulation.

There is also a real danger of troubled governments deciding that bailout conditions are too onerous to accept, yet there are few ways of getting out of sovereign debt jams aside from bailouts or default. The little trick that could be tried here would be to establish your own currency, print as much of it as you want and pay off the debts with the new legal tender. This has obvious disadvantages, like having to pay higher interest rates on sovereign debt. But with these interest rates already rising for the troubled eurozone periphery, some politicians might figure they have relatively little to lose. And in Greece especially, where a segment of the population is literally throwing rocks over austerity measures and hating the Germans for demanding them, there could be future pressure to exit the eurozone.

Other EU nations not on the Euro, such as Poland, might also wonder if surrendering control of their monetary policy to the European Central Bank is really worth it. In Poland especially, it is possible that the euro will be voted down by a public in which Germanophobia is a persistent — and considering Poland’s history, not necessarily unfair — characteristic. Other nations might delay joining the currency bloc as long as possible — note that Britain is looking clever for not joining the single currency.

This is unfortunate as the euro has had some good effects in Europe. It’s made tourism much easier, cross-border flows of goods and capital much simpler, and it was much more straightforward to figure out a bill for 3.50 euro than for 6776.90 Italian lira when I went to Italy this summer. But the serious cracks in the euro might lead to its eventual disintegration, much to everybody’s chagrin. Europe needs to do what it can to restore confidence in Portugal, Spain and Italy. If the Irish bailout doesn’t work out, however, the euro is doomed.

Think the euro won’t be worth a Continental? Write [email protected]