Butch and the Sundance

In this cynical world where expressions of faith are met with knowing looks and smirks Manuel Barroso’s confidence in the survival of the euro is  refreshing.

The European Commission head has told a conference in Lisbon that “the existential threat against the euro has essentially been overcome”.

Now while I’m all in favour of Barroso’s expressing faith in this sneering world, I must confess to some doubts about the precise object of it. I’m afraid that our noble leader may be riding for a fall.

If thrills and spills were the aim of the architects of Europe’s answer to the dollar then the euro hasn’t disappointed. Like a roller coaster ride it all started with that long ascent of rising feverish hype about the dawn of a new age.  Then we crested the first summit of delirium only to plunge earthward to despair before successive returns to the heights. And like a rollercoaster each successive high was lower than the last. Then last summer it seemed that we had reached the final abyss before the end of the ride.

Just a couple of years ago the very idea that the ride could end and the Euro zone break up was the sole province of Euro-sceptic Jeremiahs blogging about it from their bedrooms.

But by last summer it was difficult to find anyone who believed in the survival of the euro enough to actually bet their own hard earned cash on it. Specifically, the markets were demanding unaffordable rates of interest on several Euro zone countries’ debt. Ruinous collapse and general poverty were imminent.

Then the miracle happened. The European Union found a technocrat, Mario Draghi, with lead in his pencil. And it’s not an exaggeration to say that “Super Mario”, the FT’s person of the year 2012, saved the euro.

Then, in what must have seemed like the second wish from the genie of the lamp, Super Mario calmed fears with a mere whiff of testosterone in what the FT calls his “July declaration”:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

After 3 years of dousing market wild fires by firehosing hundreds of billions of taxpayer funds at the problem, it turned out that the solution to the problem was a two-sentence statement and showing some balls.

Later his declaration was made flesh with the ECB’s plan for unlimited interventions in sovereign debt markets, announced in September.

Now, I yield to no one in appreciation of what a pair of appropriately deployed cojones can achieve. But in this case, however immenso Mario's testicoli may be, like Butch and Sundance in the that final showdown with the Federales, it ain’t gonna be enough against the biggest, baddest, meanest bitch of all: reality.

Despite what Euro-socialist fantasists may want to believe, the Anglo-Saxon market jackals weren’t betting against the euro because it was cooked up by, the light for all mankind, the French. They were betting against it because it’s a stuffed shirt of a currency. There is nothing behind it.

That is now apart from Mario Draghi’s immenso nuts. So in truth the euro was not so much saved as reprieved. The end of the ride is not so imminent, but the single currency is still fated to fail.

There’s Something Rotten in the State of the Euro

The euro is doomed for a few childishly simple yet compelling reasons.

The Euro zone is not a single country. Each single currency member has its own government, its own fiscal policy, and its own distinct national character. This translates into varying degrees of economic efficiency.

In the latest competitiveness rankings from the World Economic Forum the Germans rank 6^th in the world and the Greeks 96^th. Every year the Germans do what they do better and better and the Greeks, well, they do whatever it is they do. After sharing the same currency for 10 years German efficiency vis-à-vis the Greeks had improved by 40%. In former times the Drachma would have devalued to take account of this. In the Euro zone that is impossible. So the Greeks find their exports priced out of foreign markets and even the tourists are staying away.

The Euro zone is not a nationality. In large single currency areas like the States the effects of large differences in competitiveness between the various states is cushioned by enormous financial transfers from the booming regions to the bust ones. In this way currently booming Houston, Texas funds bankrupt Detroit, Michigan. The prosperous grumble about it, but in the end they don't seriously object because they are all  Americans.

Financial transfers also take place in the EU, but it has been calculated that they are only at about 10% of the level of a real country like the USA. In short, Germans are not willing to see more their tax euros sent abroad to Greece and this means that the inevitable disparities in the Euro zone are not mitigated but grow, eventually to dangerous proportions.

The European Central Bank (ECB) is not a central bank. The ECB doesn’t have the power, for example, to employ quantitative Easing (QE) as the British, American and Japanese central banks have. Also German bonds are still German and Spanish are Spanish. Despite attempts to socialize European government debt, the Germans are further than ever away from being willing to pick up the tab for Latin profligacy.

The EU’s answer to these deficiencies has been austerity or to use a more exact word “pain” for the southerners. The party is over. Now they are being forced to cut spending, salaries and pensions until they catch up with the Euro zone high achievers.

This is just and even correct in theory. The freeloaders have got to up their game till they can mix it with the Germans.

Real World

In the real world, though, the southern voters never signed up for perpetual self-flagellation and won’t be able to stand it for much longer. They were asked to cut and they have cut, year after year. Many are suffering poverty and unemployment has reached  25% (50%+ for their young) in Greece and Spain.

The euro has always been doomed by its inconsistencies, but an economic boom along with Mario Draghi’s testicoli could yet keep the show on the road for another decade or so.

But with the European Commission itself predicting Euro zone growth next year at 0.1% there is no end in sight to the pain and something has to give.

The only thing between the euro and eternity is Mario’s threat of "unlimited" interventions in the sovereign debt markets. Sooner or later triggered by either more horrific economic data or civil unrest the markets will realize that this is an empty threat. Then the dream that is the euro will fall apart.

And amidst the debris of the once mighty European Union people will marvel at two ovoids, now sadly shrunken, lying in the rubble and wonder at Manuel Barroso’s faith in their magic power.

Then people may ask what fantastic prospect it was that the euro promised that was worth giving up so much for. And when they realise, to misquote Churchill, that: "Never in the field of human affairs has so much been sacrificed by so many to achieve so little".

Then Barroso will have even greater need of faith.