Clearly the European Central Bank president Mario Draghi hasn’t read The Wonderful Wizard of Oz. Because he’s behaving like the Wizard himself.
We know it’s just you hiding behind the curtain, Mario…
And it’s only a matter of time before everyone else realises the euro itself is nothing more than a confidence game.
My hope is that you’ll dig out a dusty copy of The Wonderful Wizard of Oz after reading today’s Capital & Conflict. It’ll help you to better understand the coming failure of the euro. And why the biggest bankruptcy in history is knocking on the stockmarket’s door.
What does the seemingly innocuous children’s novel have to do with the eurozone? The story is in fact a sort of historic parable. About monetary madness and its constraints. Let me take you back…
The setting is the US depression of 1893. Farmers are struggling with their debts and workers with falling wages.
The question of bi-metalism is at the centre of American politics. Should the government monetise silver alongside gold – the old school version of quantitative easing? Or continue the gold standard?
Enter Dorothy’s quest, immortalised in the book.
The yellow brick road Dorothy must stick to is the gold standard. Her silver slippers suggest monetary bi-metalism would get her home.
The Wicked Witch of the East personifies the wealthy bankers and industrialists of the east coast of the US, who benefit from sound money, deflation and stability. They want to stop Dorothy and her silver shoes.
The heroes of our story are well known too. The Scarecrow represents the farmers, who have no brain. The Tinman represents the industrial workers of the eastern US, who eventually find their voice, but have no heart. The Cowardly Lion is the politician William Jennings Bryan.
But Bryan finds his courage in 1896, giving what many consider to be the most famous speech in American political history:
“If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”
The crowd reportedly went utterly bananas, throwing their coats into the air when their hats weren’t enough.
Does all this remind you of anything? Perhaps you recall being inside the Eternal Recession Machine yourself? We escaped, with our precious pound sterling slippers.
This time, though, it’s the Italian Munchkins whose heroes are considering mini-BOT slippers.
Why is the eurozone the new Munchkinland?
The eurozone is in a worse position than the United States of 1893. Matthew Yglesias, the co-founder of Vox, explained why back in 2014.
In the wake of the eurozone crisis, economists were struggling to explain why Europe was doing so much worse than the US.
Because the Europeans share a currency, they cannot devalue against each other. Nor can they target monetary easing just to benefit those specific parts of the eurozone which are in trouble. (At least not legally and only via government bond markets, from where the funds can flow anywhere in the eurozone.) Thirdly, the struggling parts of Europe are stuck with an exchange rate to other currencies that suits the more prosperous countries.
The euro is imposing an artificially high exchange rate, taking away the policy mechanism of devaluation and pegging the currency against other countries in the eurozone.
Combine the three and you have the beginning of the problem. The euro has robbed countries of their traditional means to survive the aftermath of their own profligacy. Inside the euro, things are different. Yglesias explained the consequences:
“The only way to regain competitiveness is for the sheer weight of unemployment to start dragging nominal wages downward across the economy. In an enthusiastic, well-behaved country like Latvia or Ireland this is a grinding medium-speed process. In a reluctant country like Spain or Greece it’s agonizingly slow. Either way, it’s much more painful than a currency depreciation because only some prices adjust — people with old debts or long-term contract obligations get totally screwed.
“These problems of excessively valuable money used to occur globally during the gold standard era whenever there was a slowdown in global gold mining. In a famous 1896 speech, presidential candidate William Jennings Bryan alleged that American farmers and workers were being crucified on a cross of gold — made to endure avoidable suffering for the sake of the principle that gold was the only true judge of wealth. Today, unemployed Irish, Greek, Spanish, Italian, and Portuguese people are being crucified on a cross of euros. The single currency project has political motives that go beyond macroeconomic management, and keeping the project together requires someone’s interest to be sacrificed.
“Draghi’s “everything it takes” is a commitment to save the eurozone as a political project, not to save the eurozone’s citizens from mass unemployment.”
Do you see the connection now? A huge chunk of the eurozone’s crisis is the same as the US’ under the gold standard in 1893. The money supply was fixed. The valve that had to whistle to release the pressure of the depression was wages and debt defaults instead of the currency.
But politics has a habit of catching up with monetary madness. It did back in 1893 with Bryan. Today, Italian politicians of governing parties have already said much the same thing about being crucified on a cross of euros:
“I am and remain convinced that for Italy recovering monetary sovereignty would be positive and would solve many of the country’s problems,” said Claudio Borghi to Corriere della Sera newspaper.
“I remain convinced … that the euro under these conditions was an error. Which we will put right, ” Matteo Salvini told Reuters. And Claudio Borghi was also quoted:
“Before, we had a concrete hope of creating a group of nations that could have immediately demolished the euro … Sadly we no longer have that, so we need to approach it unilaterally.
“Our plan is still to try to leave the euro as soon as possible, but ‘as soon as possible’ means being ready to do so.”
They’re getting ready. Are you?
Why the eurozone is worse than Munchkinland
The eurozone’s bizarre structure means the problems are even more severe than they were in the US in 1893. And the differences between the US and European states highlight exactly how and why.
In the US, taxpayers in New York are happy to automatically send their cash to struggling parts of Nevada. In Europe, the Germans don’t like the idea of sending their money to Sicily, unless they travel with it.
Americans can move freely between states and integrate immediately. In Europe, it’s much more difficult. Especially for those workers who really need to move during rough economic times – low-skill workers. And when they do, they tend to do it as a sort of guest worker who returns home. That shifts economic activity to more prosperous countries instead of solving problems.
It’s factors like these that will tip the eurozone over the edge. As Nick O’Connor wrote in Southbank Investor Daily, the eurozone doesn’t have enough of the right pressure valves built in to last. It’ll blow up eventually.
One thing’s for sure. We’re not in Kansas anymore.
Until next time,
Nick Hubble
Capital & Conflict
Category: The End of Europe