The Euro-zone is like…

For the past several months, we have been thinking about the broader Euro-zone’s economic malaise.   In the course of conversations, we sometimes use analogies, and we thought we’d share this one with our readers.

As part of the aim to integrate Europe and limit the future likelihood of war, European countries have sought to develop deep political links (by joining the European Union) and integrate their financial markets (by joining the shared currency regime).  As a result of this process, large, developed, stable economies in Europe (Germany, France etc.) have lashed themselves to smaller, relatively under-developed, unstable economies (Greece, Portugal, etc.).

Imagine each of these countries as boats on the open ocean.  Some of them are large, modern vessels carrying many passengers, while others are smaller, rickety affairs.  In creating the European Monetary Union, these countries sought to create a larger water-craft by roping together many different boats.  There are definitely advantages to doing this.  Passengers on the boats (citizens) can now easily trade and transact with those on other boats.

However, it takes generations for all passengers to develop a sense of common destiny and values.  The Eurozone has not had that much time, yet finds itself in the middle of a large storm.  The big problem is that there is no mechanism defined to detach the larger unit from a vessel that has begun to sink in a storm.

Passengers on the sound, stable sea-craft (German burghers) do not want to put themselves at risk by stepping onto the sinking ships to help bail water, yet their captains are calling for them to do so.  Meanwhile, the combined craft made of many mis-matched boats continues to tilt and take on more water.

To compound the problem, we saw a riot on one of the sinking boats yesterday.  Some passengers (Greek nationals) on that boat tried to set it (literally) on fire.  The rest of the world does not expect such things to happen in developed economies and looks on in disbelief.

What we find remarkable, is the speed with which assumptions have changed.  Nine short months ago, virtually everyone was calling the demise of the US dollar and the rise of the Euro as the new global reserve currency. Now we are at a point where the dissolution of the Euro is being openly debated.  Greek citizens riot in the streets because their elected representatives have chosen to call a halt to profligate policies and crack down on pervasive tax-dodging and fudging of statistics.  The rest of the world stares aghast. Meanwhiles, the rats (speculators) are deserting the ship.

For a less metaphorical take on the crisis, please read Edward Chancellor’s FT Opinion piece  Greece a bad omen for others in debt.