September 22nd, 2011
11:47 PM GMT
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Editor’s note: Edward Hugh is an independent macro economist and writer based in Barcelona.

 (CNN) - According to a recent study by Stephane Deo and his collegues at UBS, the euro – as it is currently structured – should not exist. It is hard to disagree. The problem is that it does, and just like the legendary Eagles' song "Hotel California" they refer to, it was intentionally set up in such a way that once you get inside there is no way you can leave. There is no checkout procedure.

Reading the UBS report put me in mind of Stanley Kubrick’s cult film, “Dr. Strangelove.” In a key scene the U.S. President, on being informed of the existence of a device (termed the “Doomsday Machine”) which shares notably similar characteristics with the current euro area, is stupefied. On asking those around him -“but how is it possible for something to be triggered automatically, and at the same time impossible to untrigger?” – Peter Sellers, as Dr. Strangelove, replies: “Mr. President, it is not only possible, it is essential. That is the whole idea of this machine, you know.”

Which takes us directly to last week’s European Finance Ministers meeting in Poland. In a setting horribly reminiscent of the Strangelove “War Room,” U.S. Treasury Secretary Timothy Geithner informed the assembled dignitaries that, in a nutshell, Europe was facing catastrophe.

Unruffled by such evidently exaggerated doomsday mongering, the European ministers essentially told Geithner to “mind his own business” – a response which could be roughly translated as “we set this thing up, and we know how to handle it, we don’t need your help, so please buzz off.”

The challenge facing the current generation of Eurozone managers is this: The system they created is now malfunctioning and is in danger of exploding under the force of its own internal contradictions. Yet any attempt to dismantle it (by someone leaving, or making someone leave, for example) would appear to threaten all involved with consequences which could easily be far worse, not only for Europe, but for the whole global economy. Hence the dithering, and the reluctance to act decisively.

Aside from the odd panic-stricken outburst from one or other EU Commissioner in Brussels, however, it would be hard to discern this harsh reality in any of the recent statements by Europe’s leaders. The euro is a great success, our economic fundamentals are far better than those to be found in the U.S., and we will do absolutely whatever it takes to save the common currency. This is the main message they project to the world, even while doing far less than most external observers consider they need to do, a state of affairs which has led Nobel economist Paul Krugman to speak of “Pharaonic denial."

Perhaps the best example of this denial is the insistence of Eurozone managers to focus on only one part of the problem, the fiscal deficit. Only in the Greek case could fiscal excesses prior to the Financial Crisis be considered at the heart of the problem. In Italy and Portugal, the issue is more a combination of low growth and a high level of accumulated debt, an ailment which a decade of euro membership has done little to cure. In Spain and Ireland, the problems facing the economies are more a by-product of massive property bubbles – bubbles whose creation was aided and abetted by a thoroughly inadequate monetary policy administered by the European Central Bank. In all these cases the recent fiscal deficits are but symptoms of a much bigger problem, and at present only the symptoms are being treated. In the meantime even the Zone’s newer Eastern members like Slovenia and Slovakia look to be in danger of catching the disease.

Without restoring growth and competitiveness along Europe’s periphery, even the most radical solutions, like a common fiscal treasury and Eurobonds, are doomed to failure. As the population ages and demands on states increase, voters in the North will never accept cuts in their own welfare and pension systems to support economies to the South. But solutions are not being put on the table since the gravity of the issue simply is not grasped. Meanwhile the infernal machine, complete with its initial design fault, continues headlong along its pre-programmed course. Tick-tock, tick-tock goes the clock, but no one really seems to know what time it is.

Truer words were never said, even in jest: Europe is facing catastrophe. One of these fine days Greece will default, and the world as we know it will somehow have irrevocably changed. That day we will get to see the future, and will have the opportunity to learn at first hand how the euro Doomsday Machine works.



soundoff (31 Responses)
  1. Jason

    This is nonsense for two reasons. It's Eurozone managers that have no fix. The 'out' is for a Eurozone state to transition back to its own currency. Print it, send it to banks, set an exchange rate procedure, flip the switch, and voila – Euros are foreign currency. Lots of hassle for all the people with foreign money, but manageable. Secondly, economic problems are transported by currency, as economic losses are retained by the national currency. But currency itself is not the source of the problem. Manipulate the currency all you want – whatever you call it or print it on – a bad economy makes bad currency. Stop bashing the Euro and focus on the economy (easier said than done, but at least it gets closer to a solution)

    September 23, 2011 at 12:31 am |
  2. wolfi

    hallo, mario, der euro ist schon etwas weiter, ciao wolfi.

    September 23, 2011 at 12:33 am |
  3. 1

    propaganda

    September 23, 2011 at 12:44 am |
  4. streaky

    Jason, what you're saying sounds right to the untrained ear. The problem is this: some eurozone countries had access upon joining the euro to more debts than they otherwise would have been allowed by the markets.

    Thus the problem stems from the currency. It also happens to be the case that the first issue causes the second one – that there's a lot of debt held by banks in the richer parts of the eurozone.

    The euro hasn't just opened up trade in goods, it's opened up trade in debt to places and amounts it probably shouldn't have. And yes that is the fault of the currency. The greeks and others were never going to say no to what they saw as free money.

    September 23, 2011 at 12:56 am |
  5. convinceme

    another panic button? So? who's gonna ride the bomb down?

    September 23, 2011 at 1:20 am |
  6. Reg

    Looks like the proverbial chickens are coming home to roost. However, the euro will probably survive, albeit by scapegoating loads of innocents in the process. Perhaps the heydays are over, but there is no doomsday as such. The eurozone had been a little too ambitious, but is calibrating itself to a more pragmatic level. After all, the whole world's still a de-facto US dollar zone.

    September 23, 2011 at 1:25 am |
  7. Mike

    Ron Paul.

    September 23, 2011 at 1:32 am |
  8. FatSean

    Gentlemen! You can't fight in here, this is the war room!

    September 23, 2011 at 2:39 am |
  9. alain morel

    Why are so many bad things told about the Euro? Let the still young currency walk along its way .It is too early to talk.Why did the US currency stop its gold parity , that was the beginning of it all.

    September 23, 2011 at 2:53 am |
  10. alicekii85

    Black'white'meet.C_0_M-

    that's all serious dating. Millions of members with good economic

    condition and high quality. Someone suitable is here waiting for u.

    Black'white'meet .C_0_M

    with other single black, white girls and men in your city.. It is

    my favorite club for mixed love....

    – Black'w'hitemeet.'C_0_M -
    ======

    September 23, 2011 at 3:29 am |
  11. Pete

    The problem is not the euro, which is just a token. Neither is it the EU or even the US.

    The REAL problem is "Capitalism", an yet-again proved unstable and failed system. Capitalism is inherently a bubble-driven game of chairs that plods along from Great Crash to Great Crash (and the ensuing Depressions).

    Karl Mark must be laughing in his tomb.

    September 23, 2011 at 3:38 am |
  12. Anpadh

    The real problem is that the US always thinks it has all the answers. Just one problem with that - Standard & Poor's has downgraded the US, not the rest of the world.

    September 23, 2011 at 4:16 am |
  13. David Howell

    Who cares? I own my land, my machinery, and run my own businesses. Nothing has changed for us. The world can go to hell in a handbasket and it doesn't change a single thing for the people in my area. Not a thing. We still do the things that we enjoy doing and have a great life and a great community.

    I guess the difference is that we don't allow big business to make our laws around here, we don't allow banks to control our lives (we practice community lending), and we sure as hell limit government and political bullcrap interfering with our lives. It was amazing how things changed 15 years ago when we got rid of those three things from our area.

    People will do to you what you let them do. If you don't like your situation then change it. If you aren't willing to change it then shut the heck up and stop pointing fingers and whining about it.

    September 23, 2011 at 5:28 am |
  14. Paul Johnston, PhD Economics

    THE EU ZONE WAS A FRAUD BROUGHT TO US BY THE ECB, IMF and CORRUPT EU LEADERS. CHRISTINE LEGARDE HEAD OF THE IMF IS UNDER INVESTIGATION FOR FINANCIAL FRAUD. GREECE WILL NOT TAKE THIS THE PEOPLE WILL REVOLT!

    September 23, 2011 at 6:15 am |
  15. MOSES

    I believe in the nearest future, or soon as possible the "eurozone" will be history.Yeah the conspiracy theorist are right.

    September 23, 2011 at 6:41 am |
  16. Antje

    Mr Hugh loves writing fiction in literature-like phrases and a considerable bunch of nutters roams Internet forums to spew their obsessions with capitalism, conspiracies or whatever there pea-brains can come up with.

    September 23, 2011 at 7:48 am |
  17. Rick

    P R O P A G A N D A A A A A A A A A A A A A A A A

    September 23, 2011 at 9:50 am |
  18. Endovelicous

    Mr Edward Hugh, I'm sorry, but your are an imbecile, like all the amoronican "economists"!

    September 23, 2011 at 9:50 am |
  19. John

    This article shows complete ignirance of the author.
    I would suggest the author checks what was the debt to GDP ratio of countries such as Italy and Belgium before they entered the EURO.
    The article accuses the EURO of being the main cause of all the Eurozone countries budgetary problems, but a closer look at historic debt figures, would clearly show that the main cause is in fact not the EURO, but the bad policies being implemented in many member states over the last decades, even before the EURO was launched.
    I suppose the author does not say that the EURO is the cause of the US budget deficit because that would be far too stupid an idea to convince any reader, but he floats the idea of the EURO being the cause of all EURO problems, because that is an easy sell for any ignorant that has no knowledge of economic history.
    I can agree that the EURO leaves many member states without much of a margin to remedy the problem they have put themselves into, but can anyone imagine what would be the situaiotn of Greece, Italy or Portugal if they were not part of a strong currency group? Probably their currencies would be worthless, and their people living miserably.

    September 23, 2011 at 10:15 am |
  20. MB

    These comments are hilarious. Edwards point is dressed up in fiction but well made. Europe seems to be ideologically blinded to the problems of the Euro.

    If people can’t even understand the problem what hope is there of solving it?

    September 23, 2011 at 10:29 am |
  21. Grumpster

    Funny, I had just watched that movie last night.

    September 23, 2011 at 2:03 pm |
  22. strangelove

    Mein fuhrer, I can walk !

    September 23, 2011 at 2:30 pm |
  23. joe

    Germany is wising up.. carrying Greece so they can go on pension at 50 with 80% of salary won't work.. and the Euro is going down with it...

    September 23, 2011 at 2:48 pm |
  24. WacoKid

    I didn't get a Harumph out of that guy!

    September 23, 2011 at 4:56 pm |
  25. anonymous

    @alain and a few others you keep mentioning the US currency but there is no such thing any more as a US dollar. There is however a Federal reserve note which is NOT owned by the US government it is in fact loaned to the united states with interest. The reason the US ended its gold parity was because the banks were able to convince Woodrow Wilson to sign the federal reserve act that gave all control of the currency over too the Federal Reserve (which incidently is not a government agency or government owned/controlled bank.) In exchange we were given 1 seat at the table. The other seats are made up of the member banks such as BofA, C, etc. Now why did this system work in the US as opposed to the EU well its simple. The Govt. sets all base tax regulations for all states in the country. In the EU however the countries set their own regulations and in turn when their regulations fail to pay the debt burden the ECB responds by giving them more debt because call it what you want a bailout is just another loan. They also then implement "Austerity" which does not take one thing into consideration. If you cut spending using projections of todays income and don't take into account a lack of income in the future as the cuts invariably also mean more unemployment then you end up still having the same deficit tomorrow only now it makes getting your economy going even harder. Any country is going to take whatever money you hand it without thinking of paying it back because they look at the here and now and not 10 years in the future. So yes these countries shouldn't have borrowed so much but in the end the ECB will doom them all by its own narrow minded approach to solving these problems. So yes since the ECB controls the currency it is just as much at fault. What I find hilarious is how the EU countries keep making statements of how messed up we are and how they are better. If they lost that arrogance maybe they would be able to see the real problems and deal with them accordingly. Another thing to note is at this stage of the game trying to create a more federal reserve like system wont work (eurobonds) because the financial wealth they had that helped jump start the euro originally is no longer there. This will end badly for Europe but if they take steps to mitigate it properly then the effects will be short lived.

    September 23, 2011 at 5:25 pm |
  26. Steve

    2+2=4 The problem is that to many people, governments and organizations try to make it equal 5 or 6. Eventually it will come back to four. Sometimes it will come back softly, sometimes it will snap back and it will hurt.

    September 23, 2011 at 6:23 pm |
  27. Bob

    It's so funny to see the americans desperately trying to divert attention from their own economic catastrophy, by trying to paint the EU as being worse off. It's especially ironic since the economic issues in the EU were triggered by the bank collapses in the US. Now, please concentrate on fixing your own economy, instead of blabbering about the euro, all the while the US is going down in flames....

    September 24, 2011 at 12:43 am |
  28. Jane

    I just got a $829.99 iPâd2 for only $103.37 and my mom got a $1499.99 HDTV for only $251.92, they are both coming with USPS tomorrow. I would be an idiòt to ever pay full retail prices at places like Wâlmart or Béstbuy. Go here at CoòlCént.còm

    September 24, 2011 at 2:03 am |
  29. lolface

    According to every single natio no currency should exist, with defitcits far exceeding national incomes, each nations currency is worth as much as T.P. and should be used for double whiping. It is inevatable that the economy will collapse, not a maybe it will happen some day no matter what because the structure of the world economy is majorly flawed.

    September 24, 2011 at 7:28 pm |
  30. DameMak

    In order to save the world from a new financial crisis, the Euro zone should indeed remove Greece from Euro zone. It will not break up the currency. When you have a tumor you try to cure it with medications (for the financial tumor those are the austerity measures), and if that tumor is continuing to grow (the financial tumor of Greece i.e. its debt is continuing to grow) then you HAVE TO go for surgery. If the rest of the body is strong – the surgery is usually successful. The rest of Euro zone although with troubles is much healthier than the increasing Greek tumor and will survive the surgery called: "Removing Greece from Euro zone".

    September 26, 2011 at 9:32 am |
  31. 2012 survival

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    April 9, 2012 at 3:15 am |

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