The Death of Money (18 page)

In twenty-first-century economies, all aspects of this theory are flawed, starting
with the premise. Sticky wages are a special case, arising in limited conditions where
labor is a predominant factor input to productivity, labor substitutes do not exist,
unionization is strong, globalized outsourcing is unavailable, and unemployment is
reasonably low. Today all those factors are reversed.

Capital is the predominant factor input, robotics and outsourcing are readily available,
and the union movement is weak in the private sector. Consequently, workers will accept
lower nominal wages if that enables them to retain their jobs. This form of lowering
unit labor costs is known as
internal adjustment
via lower wages versus
external adjustment
through a cheaper currency and inflation. External adjustment may have worked in
the 1930s in the U.K., when Keynes first advanced his ideas on sticky wages. However,
under twenty-first-century globalized conditions, internal adjustment is a far superior
remedy because it treats the problem directly and avoids the exogenous costs of breaking
up the Eurozone. As a case in point, on July 2, 2013, Greece’s Hellenic Statistical
Authority (ELSTAT) reported that
private-sector salaries in Greece had dropped an average of 22.3 percent since the
first quarter of 2012, a clear refutation of the obsolete sticky-wage theories of
Keynes and Krugman.

The sentiment that sticking with the euro is desirable, despite contracting economies
and falling wages, is widely shared among everyday citizens in the Eurozone periphery
despite the pretensions of academic theory. In 2013 Marcus Walker and Alessandra Galloni
did extensive reporting on this topic for
The Wall Street Journal
and
revealed the following:

Across Europe’s southern rim, people recoil at the idea of returning to national currencies,
fearing such a step would revive inflation, remove checks on corruption and derail
national ambitions to be part of Europe’s inner circle. Such fears outweigh the bleak
growth outlook that has prompted many U.S. and U.K. economists to predict a split
of the currency.

Only 20% of Italians say leaving the euro would help the economy. . . . Strong majorities
in Spain, Portugal, Greece and Ireland also reject an exit from the euro, recent polls
show. . . .

“Europeans who now use the euro have no desire to abandon it and return to their former
currency,” according to a survey by the Pew Research Center. In Spain and Portugal,
70% or more of people want to stick with the euro, recent polls found.

The fifth and final analytic blind spot of the Euro skeptics was a failure to understand
that the euro is—and always has been—a political project rather than an economic one
and that the political will to preserve it was never in doubt. A true understanding
of the euro is summarized by leading French intellectual Guy Sorman:

Europe was not built for economic reasons, but to bring peace between European countries.
It is a political ambition. It is the only political project for our generation. We’ll
pay the price to save this project.

In sum, the euro is strong and getting stronger.

■
The Euro’s Future

This
tour d’horizon
of the Euro skeptics’ analytic blind spots not only rebuts their criticism of the
euro but reveals the euro’s underlying strengths and future direction. These strengths
are part of a larger, emergent worldview of how to prosper in a highly competitive,
globalized economy.

The most encouraging reports involve Greece, the economy that was most reviled. Over
$175 million of new money entered the Greek stock market between June 2012 and February
2013, and according to
The Wall Street Journal,
“
everything from Greek real estate to energy stocks are finding buyers.” In April 2013
the troika approved the disbursement of further bailout assistance to Greece based
on its progress in cutting government spending and moving toward a balanced budget.
On May 14, 2013, the Fitch service upgraded Greece’s credit rating, and in a review
of the Greek economy,
The New York Times
reported, “
The drive to improve competitiveness, mainly through much lower wage costs, is finally
bearing fruit, too. This is most visible in tourism, which accounts for 17 percent
of gross domestic product. Revenues are expected to jump 9 percent to 10 percent this
year.” Greece is also benefiting from the privatization of government-owned assets.
The fifteen-hundred-acre former Athens airport site is expected to attract €6 billion
of investment to establish a mixed-use development that should create more than twenty
thousand well-paying jobs.

Another recent story from Greece involves events tantamount to a controlled experiment,
something economists seek but seldom find. Prior to 2010, port facilities in the major
Greek port of Piraeus had been owned by the government. That year the government sold
half the port for €500 million to Cosco, a Chinese shipping concern, while retaining
the other half. A comparison of operations in the Chinese- and Greek-controlled halves
of the facility in 2012 showed a striking contrast:

On Cosco’s portion of the port, cargo traffic has more than doubled over the last
year, to 1.05 million containers. And while profit margins are still razor thin . . .
that is mainly because the Chinese company is putting a lot of its money back into
the port. . . . The Greek-run side of the port . . . endured a series of debilitating
worker strikes in the three years before Cosco came to town. . . . On the Greek side
of the port, union rules required that nine people work a gantry crane; Cosco uses
a crew of four.

This comparison perfectly illustrates the fact that there is nothing intrinsically
noncompetitive about Greek workers or Greek infrastructure.
Greece needs only more flexible work rules, lower unit labor costs, and new capital.
Chinese capital is a conspicuous part of the solution, and Chinese investors such
as Cosco are willing to commit capital when a productive business climate can be assured.

Developments in Spain are equally encouraging. Spanish unit labor costs have already
dropped over 7 percent relative to Germany, and economists expect further decreases.
In February 2012 Spain’s prime minister, Mariano Rajoy, implemented laws that increased
labor flexibility by allowing employers to terminate workers in a downturn, reduce
severance pay, and renegotiate contracts entered into during the property boom prior
to 2008. The result was a drastic increase in Spain’s competitiveness in manufacturing,
especially the automotive industry.

The positive effect was immediate. Renault announced plans to increase production
in the northern Spanish city of Palencia. Ford Motor Company and Peugeot also announced
increased production at their plants in Spain. In October 2012 Volkswagen announced
an €800 million investment in its plant near Barcelona.
All these investment and expansion plans will have positive ripple effects because
the large manufacturers are tied to a network of parts suppliers and subcontractors
throughout Spain.

The expanded employment and output as the result of lower wages in Spain is a refutation
of the sticky-wage theories of Keynes and Krugman, and it is happening on a widespread
scale from Greece to Ireland. Although this is a difficult and painful adjustment,
the shift is sustainable, and it leaves Europe well positioned to be a globally competitive
manufacturing base and magnet for capital inflows.

The Economist
, along with many others, has cited
adverse demographics as a major hurdle in the way of more robust European growth.
Europe does have a rapidly aging society (as do Russia, Japan, China, and other major
economies). Over a twenty-year horizon, the demographics of working-age populations
are rigid in a closed society, which can be a large determinant of economic outcomes,
but this view ignores forms of flexibility even in a closed society.

A working-age population is not the same as a workforce. When unemployment is high,
as it is in much of Europe, new entrants can come into the workforce at a much higher
rate than population growth,
assuming jobs are available. The pools of well-educated unemployed are so large in
Europe today that demography places no short-term constraints on productive labor
factor inputs. As noted, improved labor mobility can also facilitate growth in the
productive workforce by enabling unemployed workers in the Eurozone’s depressed regions
to move to more productive regions to supply the labor needed. Immigration from eastern
Europe and Turkey can supply ample labor to western Europe, much as the Chinese interior
has supplied labor to Chinese coastal factories for decades. In short, demographics
are not a constraint on European growth as long as there is underutilized labor, labor
mobility, and immigration.

*  *  *

Internal economic adjustment alone may not be enough to secure the future of the euro
and the EU more broadly. Expansion of the institutions of the EU will also be required,
as captured in Merkel’s phrase “More Europe.” The EU is like an aircraft with a single
wing; it can choose to remain grounded, or it can build the other wing. Efforts to
deal with the immediate crises in 2010 and 2011, including monetary ease and multilateral
bailout packages, have been sufficient to avoid a collapse, but they are not sufficient
to correct the fundamental contradictions in the design of the euro and the ECB. A
single currency has been shown to be dysfunctional without uniformity of fiscal policy
and bank regulation, along with improved mobility of labor and capital among currency
union members.

The good news is that these deficiencies are well understood by political and financial
leaders in Europe and are being remedied at a rapid pace. On January 1, 2013, the
EU Fiscal Stability Treaty entered into force for the sixteen EU member nations that
had ratified it as of that date, including all the periphery nations. The treaty contains
binding procedures requiring signatories to have budget deficits of less than 3 percent
of GDP when their debt-to-GDP ratio is under 60 percent. In cases where the debt-to-GDP
ratio exceeds 60 percent, the deficit must be less than 0.5 percent of GDP. The treaty
also contains the so-called debt brake that requires signatories with a debt-to-GDP
ratio in excess of 60 percent to reduce the ratio by 5 percent of the excess each
year until the ratio is less than 60 percent. Treaty provisions are implemented
and enforced at the member level for the time being, but the treaty stipulates that
the members will incorporate the treaty rules in the overall EU legal framework before
January 1, 2018.

An EU-wide bank deposit insurance program to mitigate banking panics is currently
under consideration, as are proposals to replace separate sovereign bonds issued by
Eurozone members with true Eurobonds backed by the credit of the Eurozone as whole.
Action on these fronts may follow, but first further progress must be made on fiscal
restraint and other market reforms.

The threads of banking union and consolidated bailout funds have begun to intertwine.
In June 2013 a Euro Working Group of senior finance ministry officials from the Eurozone
announced
a €60 billion bailout fund to provide direct support to banks in distress.

Beyond these fiscal and banking reforms, the EU’s future is further brightened by
the accession of new members either to the EU, the Eurozone, or both. In July 2013
Latvia received approval from the European Commission and the ECB to adopt the euro
as its currency. Croatia officially became an EU member on July 1, 2013, and its central
bank governor, Boris Vujcic, announced that Croatia wanted to move as quickly as possible
to full adoption of the euro as its currency. Candidate countries whose membership
in the EU is under way but not yet completed are Montenegro, Serbia, Macedonia, and
Turkey. Potential candidates who do not yet meet the requirements for EU membership
but are working toward conformity are Albania, Bosnia and Herzegovina, and Kosovo.
In the future, it is not too much to expect that Scotland and Ukraine may apply for
membership.

The EU is already the largest economic power in the world, with combined GDP greater
than that of the United States and more than double that of China and Japan. Over
the next ten years, the EU is destined to evolve into the world’s economic superpower,
stretching from Asia Minor to Greenland and from the Arctic Ocean to the Sahara Desert.

Germany sits at the heart of this vast economic and demographic domain. While Germany
cannot control the entire region politically, it will be the greatest economic power
within the region. Through its indirect control of the ECB and the euro, it will dominate
commerce, finance, and trade. Eurobonds will provide a deep, liquid pool of investable
assets
larger than the U.S. Treasury bond market. If needed, the euro can be supported by
its members’ combined gold holdings, which exceed 10,000 tonnes, about 25 percent
more than the U.S. Treasury’s official gold holdings. This combination of large, liquid
bond markets, a sound currency, and huge gold reserves may enable the euro to displace
the dollar as the world’s leading reserve currency by 2025. This prospect will hearten
Russia and China, which have been seeking escape from U.S. dollar hegemony since 2009.
Germany is also the key to this monetary evolution because of its insistence on sound
money, and because of the example it has set of how to be an export giant without
a weak currency.

Germany’s new Reich, intermediated through the EU, the euro, and the ECB, will be
the greatest expression of German social, political, and economic influence since
Charlemagne’s reign. Even though it will come at the expense of the dollar, the changes
will be positive in most ways, because of Germany’s productivity and its adherence
to democratic values. Europe’s diverse historical and cultural landscape will be preserved
within an improved economic framework. With German leadership and foresight, the EU
motto, “United in diversity,” will be realized in its truest form.