Is it too late for the euro?

Liaquat Ahamed Dec 5, 2011

Liaquat Ahamed: The conventional wisdom is that the euro is in trouble because a bunch of profligate governments have borrowed too much.

Kai Ryssdal: Commentator Liaquat Ahamed.

Ahamed: They are now facing terrible difficulties in rolling over their debts. And so the proposed solution is government austerity.

Unfortunately, the euro’s problems however go much deeper. The reason that investors have become so unwilling to continue to lend to countries such as Italy has less to do with the size of their debts and much more to do with their growth prospects. Growing countries, like growing companies, have little problem borrowing. It is when growth slows down to a crawl that creditors take fright.

Why are the future prospects for growth in Southern European counties so bad? Simply put, they have allowed themselves to become severely uncompetitive by allowing their wages to rise to close to German levels without German levels of productivity.

If they are to revitalize growth, while remaining within the euro, they will have to restructure their economies. The crisis has raised the specter that the euro will fall apart and there will be a return in Greece to the drachma or in Italy to the lira. What does that mean? More trouble. If you are an Italian or Greek corporation, why would you keep your euros in a local bank? You don’t know what currency you might eventually get back. When you could shift your money to a German bank and be sure that you’ll get euros back. Not surprisingly, therefore Greek banks have lost 20 percent of their deposits over the last year. The bank run has now spread to Italy.

So far, the European Central Bank has been willing to act as the lender of last resort by providing hundreds of billions of euros in loans to banks under pressure. Germany will soon have to decide whether it is willing to foot the bill in the event that some of these debts go bad. If this doesn’t happen and the European Central Bank is forced to stop its lending, that will be the end of the euro as we know it.

Ryssdal: Liaquat Ahamed is the author of “Lords of Finance.” Got a comment? Write to us.

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