Yves sent me a fascinating poll from France, that the Euro is more unpopular than ever before:
Eight years after euro notes and coins hit the streets, 69 percent of French people said they regretted the passing of the French franc, the Ifop poll for Paris Match said.
That compared to just 39 percent a month after the arrival of the euro in February 2002, and 61 percent in 2005.
The Euro may implode faster than anyone thinks (although not presently). The rescue of Greece is not done, since they first must show some fiscal restraint. While this is unlikely to be ratcheting the stock market – the moves in and out of the Euro have a bigger impact – it will have an impact over the bond market. The moral hazard of rescuing the Greeks is pretty clear, as the rest of Club Med (Spain, Italy, Portugal) will wish to also be rescued. Yet backing off the rescue risks the concept of the Euro. How to square the two needs?
There are three models of fiscal restraint:
- Gold, where Greek gold would have fled a while ago .. yet nations learned how to cheat on this
- Floating, where the Drachma would have dropped .. but that belies the concept of a Euro
- Bonds, where the bond market is the governor against poor fiscal policies
Right now the purported benefits of the single currency regime are being tested. When Greece came in, they had a huge deficit and promised to do better, but didn’t. Same with the other members of Club Med. They got a windfall: their citizens suddenly had a more valuable currency, could borrow at lower rates, and splurge. And splurge they did. Now the one-time benefit has run out, and the Greeks did little to invest in production. Instead, they ran up a huge bill for the Olympics.
In contrast the Nordic economies have a culture of fiscal restraint, and have much stronger (floating) currencies, much less debt, and appear to be taking care of their social needs much better. You probably could not find a better comparison of Austrian vs Keynesian policies. If Keynesianism worked, Club Med would be the largest economies in the world, given their propensity for fiscal stimulus and chronic indebtedness. (Ok, I grant that the Nordic countries would not consider themselves Austrian, and the Keynesians would disown Club Med, but the larger point stands about fiscal profligacy vs fiscal conservativeness).
The tension for the EU is Germany tends towards Nordic, remembering the hyperinflation of the Weimar Republic, and France is somewhat in the middle. Why should they bail out Greece, and assume the responsibility for Greece not living up the promises it made when it joined?
They cannot simply back the Greek debt without letting all of Club Med off the hook. One way out is to spin Greece out of the EU. I do not see this happening. Another way is to let it default on its bonds, and not back them. Thus would be like a floating currency, or gold leaving the central bank: a rapid signal to get the house in order. I also do not see this happening, as it would lead to riots and huge turmoil inside the EU.
Instead, I see an IMF-style workout plan. The interesting question for the future of the EU is whether they will truly take the steps to enforce it. This will play out in slow motion over the rest of the year.