CZECH REPUBLIC PRESIDENT: THE EMU HAS “FAILED”

Well, it looks like someone in Europe finally gets it. In an essay in today’s WSJ Czech Republic President Václav Klaus finally admits what I’ve been saying for years – the EMU is a failure and will require serious restructuring if it is to ever work.  Klaus recognizes that it is not fiat money that is the problem here, but the single currency system:

“People like me understood very early that the idea of a European single currency is a dangerous project which will either bring big problems or lead to the undemocratic centralization of Europe.”

The EMU has not benefited the member nations.  In fact, it has been directly tied to a slow-down in Europe over the last few decades:

“After the establishment of the euro zone, the economic growth of its member states has slowed down compared to previous decades, increasing the gap between the rate of growth in the euro-zone countries and that in other major economies—such as the United States and China, smaller economies in Southeast Asia and other parts of the developing world, as well as Central and Eastern European countries that are not members of the euro zone. Economic growth in Europe has been slowing down since the 1960s, thanks to the increasingly damaging economic and social system which started dominating Europe at that time.”

Klaus also hits on what I have been stressing is the most important issue here.  A single currency system causes inherent trade imbalances:

“We have also seen an increase in long-term trade imbalances. There are countries where exports exceed imports and countries that lastingly import more than they export. It is no coincidence that the latter countries also have higher inflation. It has no connection with the world-wide crisis. This crisis “only” escalated and exposed longtime hidden economic problems; it did not cause them.”

Does Klaus believe the Euro will collapse?  No.  He recognizes that too many careers have been built on this failed experiment and they will try to make it work at any cost.  This will result in slower economic growth:

“The second meaning of the term collapse is the possible collapse of the euro zone as an institution, the demise of the euro. To that question, my answer is no, it will not collapse. So much political capital had been invested in its existence and in its role as a “cement” that binds the EU on its way to supra-nationality that in the foreseeable future the euro will surely not be abandoned.

It will continue, but at a very high price—low economic growth. It will bring economic losses even to non-members of the euro zone, like the Czech Republic.”

In the end, Klaus recognizes that the only way to save the EMU is thru “radical” restructuring:

“In the long run, it can be saved only by a radical restructuring of the European economic and social system.”