The euro was supposed to become comparable to the Dutch guilder or the German mark; not like the Italian lire or the Greek drachma. In order to realize this goal, the common currency was built on two pillars: The European Central Bank (ECB) was designed to function as an independent central bank, modeled after the German Bundesbank. Furthermore, the Stability and Growth Pact imposed sound fiscal policies on all euro area countries. The latter was sorely needed given that, through the euro, French or Italian problems would become our mutual problem.
To sum up: we have made rules and agreement with our friends in the euro area. And in the first decade after the euro was introduced, they at least pretended wanting to conform to those agreements. But today, they don’t even exert the effort to keep up appearances. Nowadays, a country like France simply publicly announces that it will not conform to the European budgetary rules for some time to come.
Prior to the euro’s introduction, a lot member states had very different economic, financial and monetary policies than we did in the Netherlands. The core of our economic model was made out of a strong currency, relatively healthy public finances, and low inflation. However, the economic model of the Club Mediterranean consisted out of a weak currency, piling debts, and a relatively high inflation.
Before the euro was introduced, many member states had a very different economic, financial and monetary policies than we did in the Netherlands. The core of our economic model consisted out of a strong currency, relatively healthy public finances and low inflation. The economic model of the Club Mediterranean however, was based on a weak currency, piling debts, and a relatively high inflation. When economic circumstances appeared to deteriorate, they simply devalued their own currency and the whole cycle would start over again.
There was no longer an easy way out after the euro was introduced. The result? One country after another found itself in a lot of trouble. Without billions of euros of our support, many weak euro area countries would’ve been bankrupt by now. We’ve put hundreds of billions in our effort to save the euro, but the result has been disastrous. The euro is far from being saved, and the amount we’re spending on it just keeps growing and growing.
The first pillar on which the euro was built is the ECB. It received a clear manual to follow: It was expected that it avoids imprudent and dangerous affairs (e.g. financing government deficits, keep interest rates low for a long time, tolerating high inflation – let alone aiming for it). Not because some theory stipulated it was undesirable, but because we knew, from practice, what good and bad economic policies are. It is not a coincidence that Germany and the Netherlands were the strongest and competitive economies of Europe, and that their governments could finance themselves at interest rates where other countries couldn’t even have dared to dream of.
But the ECB is ignoring all of these rules. Financing government deficits of the weak euro countries is something what the ECB, led by the Italian Mario Draghi (President) and the Portuguese Vítor Constâncio (Vice-President), does all too well: they gladly do it, and they do it often. In the ECB’s Governing Council, national interests are key – also again in violation of the agreement – when deciding on policy. And in this council, countries such as the Netherlands and Germany are in the minority. The Club Mediterranean has taken over.
The ECB has promised to keep interest rates low in the coming years, at any price necessary. It is even prepared to cut them further below 0 percent, in order to boost inflation. While the ECB aims at 2 percent inflation a year, but experiences from the past tell us that the bank doesn’t take stride in condoning a much higher percentage for a long period of time. Between the summers of 2000 and 2008, inflation in the euro area was above the 2 percent ceiling, and for a year it even approached 4 percent. Even then, the ECB did not care much (in an earlier article I wrote that the ECB has promised us, back in December, to allow inflation of more than 2 percent a year). Weak euro countries with mounting debts benefit most from high inflation. And what is worse: they currently have the ECB’s power in their grasp. For the Netherlands, high inflation is extremely dangerous: it eats away on our thousand billion euros of pension money. Inflation is our pension’s largest enemy.
Now that the ECB has used its entire arsenal to support the economy with no significant results, it tries to find refuge in doing more of the same. If buying 60 billion euros’ worth of government bonds each month doesn’t cut it, the ECB doesn’t wonder whether its approach is working out. Instead, its executives believe that they’re ‘not doing enough.’ Which is markets are expecting the ECB to raise the monthly purchases under its asset purchase program to 70 billion euros each month. The same principle applies to negative interest rates: if a policy rate of -0.1 percent isn’t enough, then we should move to -0.3 percent! I wouldn’t be surprised if monthly purchases were to reach 100 billion euros by the end of the year, and the ECB’s deposit rate -0.5 percent or even lower.
The goal of these policies are to undermine the value of the euro. The ECB President leaves no opportunity unturned to warn us that he will act if the euro were to strengthen. Figuratively, he’s close to carrying a sign with slogans such as ‘the euro is worthless’ and ‘dump the euro.’ Which is strange, considering it would be the same as Wim Duisenberg, who was the President of the Dutch Central Bank between 1982 and 1997, laughing at investors for having trust in the Guilder. Undermining your own currency, something you should be proud of, is in fact currently the economic model of the euro area.
To summarize: our economic model, the model that the other euro area countries said they were going to replicate, has been tossed overboard. The ECB has been taken over by countries that have a very different idea of what good monetary policy is. They want to force their economic model down our throat, even though it is demonstrably wrong. Why? Well, if you believe Club Mediterranean’s model was better than ours, why haven’t Greece, Italy, Spain and France kept Germany and the Netherlands alive from 2009 onwards? Why instead, have we kept them alive with hundreds of billions of euros?
Does that mean there is no theoretical possibility that the euro is here to stay? Of course, there is. The euro will stay if we either accept the economic model of the Club Mediterranean countries, or if they start implementing our model. By now, it should be abundantly clear that the southern countries don’t want to adjust to our model. That leaves only one option: that we implement the Greek/French/Italian model, as well as their financial norms and values, although they are demonstrably bad for our economy. As long as countries like the Netherlands are not prepared to leave the euro, we will have to prepare ourselves for Greece-style and Italy-like economic conditions. One of the consequences is that we’ll have to accept high inflation, and that high inflation as well as political and economic instability will be the norm. Our previous experience tells us that precious metals will perform well under such circumstances.