The euro. A story of a permanent collapse

It is falling apart again. The euro area, of course. The currency seems to possess this odd feature: while being the second most widely used currency in the world, the euro's life is accompanied by a choir of prophets of a soon demise. Just a couple of years ago, we survived the previous surge of doom-saying prophecies with Paul Krugman and others seeing a euro "on the verge of imploding". Now, we seem to be heading for the next round of euro-bashing. Again, we hear the alarmed voices of Anglo-Saxon economists, the Greek bond yields spike up, and the cover of "the Economist" features European leaders in a sinking paper ship.

Of course, there is some truth in it. The euro area still lacks a US-like fiscal transfer system, no eurobonds are in sight, and labor and capital markets remain fragmented. The sovereign debt crisis has resulted in some progress in some areas e.g. the so called two-pack and six-pack will strengthen the union's fiscal governance and the establishing of a banking union will help to break the feedback loop between banks and sovereigns. But still, if the United States is used as a benchmark, those seem rather small (and insufficient) steps.

Despite those flaws, the euro area is still alive and, with Lithuania joining in January 2015, growing and, Somehow, I am skeptical about the whole catastrophe scenario: a strong gravitation force pulls the euro area together, and usually, the strength of this force is undervalued by outside observers. Why so?

The optics of adjustment may misguide. Most of us have never seen the Great Depression but we know how those years looked like: poverty, unemployment lines, and lines at soup kitchens. If a movie is set in the 1930s America, it is done with a clear purpose: to summon a devastating crisis on the protagonist. And this stereotyped thinking is not confined to just Hollywood. Look at the imagery of this 2011 IMF public relations video about the crisis in the Baltics: winter, cold, many senior people, some homeless people, and inevitably (minute 4:13), a soup kitchen! It simply had to be there!

Stereotypes could be useful tools helping to convey the message efficiently. First 30 minutes of any movie are packed with those, thus, appropriately creating space for the plot. The problem is that even in the midst of the Great Depression, the unemployment rate never exceeded 25 percent. But if 25 percent are out of work, the remaining 75 percent of the workforce are actually employed! From what I remember from the 2008/2009 Latvian crisis (a commensurate 22 percent GDP drop) is that those who were employed or, like the retired, had any income were actually feeling reasonably well. Maybe some of them were worried about their job security but their real wage, even after significant cuts, actually looked acceptable (owing to some offsetting deflation). Given that the boom sectors suffered the most, the social standing of those employed actually improved.

Besides, more often than not the crisis-accompanying fiscal consolidations are done in a manner protecting the poor and the vulnerable. In the two most prominent cases of the first wave of the crisis – Latvia and Iceland, the share of the persons at risk of poverty actually declined during the adjustment years (2010/2011) and so did the Gini index. Also, those who "sinned" (real estate developers etc.) suffered the most; the rest took the hit together. Thus, the crisis also brought some soothing feeling of solidarity and justice. That the number of traffic accidents and the mortality rate decline in crises is a well-known fact, but the research by Ásgeirsdóttir, et al., 2012 also suggests that the incidence of heavy drinking declined and the Icelanders also cut on the habit of consumption of unhealthy foods, smoking and indoor tanning. In many respects, for those employed, the quality of life remained good or even improved during the crisis.[1]

I remember the surprise of all the experts when the Latvian prime minister, following 15 percent of GDP (including also 30 per cent cuts in public sector employees' salaries) expenditure cuts, was reelected three times in a row. Again, an awkward cliché was put forward: "probably, they're afraid of Russians or something". For me, however, it was no surprise at all. The language barrier may be to blame, but for most American experts, Europe and its' periphery is like a far away snow globe. Reading the news in the rather euro-skeptic UK press is probably as close as you can get to knowing what is going on inside the globe. But being inside the snow globe is not necessarily as terrifying as it may seem from outside.

The second thing missed by many observers is fear. Europeans will probably never be a united nation, like the US. Nevertheless, the process of integration is ongoing. People do not want to return to a Europe divided by borders, and for the younger generation, the European identity is already stronger than for the generations before (a funny fact with a lot of meaning: according to "The Independent", the EU's Erasmus study abroad program seems to be responsible for 1 million babies.).

More importantly, if not the general population, the elites clearly understand that without the continuation of the EU project, Europe is simply doomed. Some countries may live quite well for a while but sooner or later the sheer size of the talent pool accessible to larger emerging markets and the US will prevail. The current slow recovery, having its roots in weak competitiveness, might give us some clue of the things to come. Europe is a continent in decline and the idea of a further European integration is the only thing that keeps this decline slow and orderly (and some hope of a rise). A total collapse of the euro area would be a clear message to the world that "that's it, we cannot go further than that", also meaning that, from now on, there is no real hope ahead of us — a chilling prospect indeed.