Sunday 5 June 2005

Pic of the day: How the mighty have fallen, and all that. (Screenshot from City of Heroes.)

Fall of the Euro

No, I haven't been so wrapped up in myself that I didn't notice. I live on the fringes of Europe, after all, even if Norway is not a member of the European Union. And not likely to become one for a few years now, at least, while the Europeans try to find out what the European Union is supposed to be.

Two of the founding members of the EU voted a resounding No to its constitution. Even in France, the numbers were roughly 55% no against 45% yes, which contrary to popular belief is not a 5% victory for the "no" side, but a 10% victory, which is pretty good. In the Netherlands, there wasn't really any contest at all. It was pure slaughter for the poor treaty. It didn't stand a chance.

The EU constitution is dead, it is just not buried yet. Several countries have ratified it. These are typically countries where the political elite avoid the use of referendums and don't wait until after elections, because they don't want the bothersome people to influence the process. They know that once things are finished, the people will accept it eventually. Or they are East European countries which are just happy to be out of the communist block and into the promised land of the European Union, so they gratefully accept anything that has the EU label on it.

But the deal was that every member country had to accept the constitution. This clearly will not come to pass now. And there are still several countries left that are unlikely to accept the constitution now. If it were just one or two of the fringe members, they could be bullied into accepting it under threat of being expelled from the union. But you cannot expel France. That's kinda like amputating the heart. Without France, the EU is dead. So it's back to the drawing board.

Some politicians of the more unruly kind are muttering that their country ought to leave the monetary union, cut out the Euro and go back to their own currency. This is highly unlikely. At least it won't happen unless the political process breaks down a lot worse than now. But the Euro as a world currency has been dealt a horrible blow. The effects of this are big, really big.

***

Last year, the US dollar grew steadily weaker against the Euro and most other currencies. As well it should, because the American growth was based on borrowing, borrowing and more borrowing. The country imported much more than it exported, so much so that near the end of the year the nation had to borrow $2000,000,000 each day. In order to change this, one of three things can happen: Either some revolutionary invention makes the nation much more productive; or the workers start working for much less pay; or the currency goes way down, so American goods become cheaper and foreign goods more expensive. The last alternative is generally seen as the most likely. It is still a problem for the common man, since prices go up more than wages. But after partying as hard as the USA has done for a long time now, it had to come. Or so we thought.

But lately, the dollar has strengthened. The immediate reason for this is that the Federal Reserve, the central bank there, is raising interest rates. At a measured pace, yes, but inexorably. This means the end of cheap credit, but at a speed that lets people adapt. It also means that putting money in American banks is likely to give a higher interest than putting them in, say, German or Japanese banks. So money flows in, and this strengthens the dollar.

With the Euro stumbling in its own shoelaces, the dollar is strengthening even more. This makes it harder and harder to export, or for domestic production to compete with imports. Basically it means that the most human-friendly solution to the American dilemma is drifting away. Unless UFOs come down from on high and bestow their technology on the USA alone, something unpleasant will have to happen to bring the balance back. But instead of something painful happening this year, it would seem that some more time will pass over it. And this time could change the re-balancing from a nightmare to an unbelievable disaster. It isn't just about the USA anymore. Civilization as we know it is slowly, slowly edging toward a horror scenario.

The last time the USA crashed and shut the door on the world, we got the Great Depression and the emergence of Nazism and Fascism, followed by World War II and then the Cold War. This isn't just a matter for economists anymore. With Europe lost in internal bickering, Japan retiring, and China still a developing country (and a de facto dictatorship at that), it is hard to see who will take up the slack if the USA defaults on its debts and withdraws from international economy for a while.

A united Europe with a strong currency would grudgingly have been able to take on some of the load. I think we can write off that option for quite a while now. "Non" indeed.