Scapegoating the money.

Photographer: Philippe Huguen/AFP/Getty Images

Don't Worry About the Euro; It'll Be Fine

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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To many observers, especially in the U.S. and the U.K., what's happening to Greece is only a symptom of a broader euro crisis. Many people blame the common currency for low economic growth, the excessive debt burdens and high unemployment in the European Union's periphery, and pretty much everything that's wrong with Europe's economy. Yet the euro works, and most people who use it like it, including Greeks.

The debt crisis, even if it ends with Greece dropping the euro, may well strengthen, not weaken the common currency. Just 15 years after its introduction, countries and companies are still learning how to use it right, and mistakes made in these early years should be food for thought, not grounds for panic.

The euro is now so maligned that U.S. news outlets treated with disbelief and derision Lithuania's decision to adopt it. In a January piece in the Atlantic titled "Why Would Anybody Adopt the Euro in 2015?," Adam Chandler suggested that the Baltic nation became the 19th euro member to protect itself from Russian aggression. Matt O'Brien of the Washington Post made the same point in a post under the heading "Lithuania has officially jumped aboard the Titanic that is the euro," warning Lithuanians: "Don't let the door hit you on your way in."

The explanation is somewhat ironic given that Russia itself last year shifted more of its cash stockpile into euros as it fled the U.S. dollar: At the end of 2014, 46.1 percent of Russia's international reserves was held in euros, a 5.2 percentage point increase in 12 months. And while that's an unusually large share, euros make up 22.1 percent of all countries' foreign reserves, significantly more than the combined 15.7 percent share that its predecessors -- the Deutsche mark, the French franc and the Dutch guilder -- had in 1998, their last year as reserve currencies. This is one of the clearest indications that the euro is greater than the sum of its parts.

In any case, ordinary Lithuanians didn't get the jokes and Titanic references. Before their country adopted the common currency, 57 percent thought it would be good for Lithuania, and immediately after the change, last January, support rose to 60 percent. Fifty-four percent said the euro was good for them personally -- a sentiment that's hard to explain by fear of Russian invasion. Rather, the euro makes it easier for Lithuanians to travel and order goods online from other European countries. It's no longer necessary to do the annoying currency conversion. (The exchange rate, at the end, was 3.4528 litas per euro.)

Of course, Lithuanians might like the euro because they don't have much experience with it. Yet those who do are also mainly fond of it. In fact, the latest Eurobarometer survey on the issue, conducted last fall, showed that in most euro area countries people were happier with it than they had been the year before: 

In the same survey, Italy and Cyprus were the only countries without a pro-euro majority, and they didn't have an anti-euro majority, either.

Apart from making tourism and cross-border trade easier -- especially for individuals and smaller companies, but also for big ones that no longer need to hedge currency risks -- the euro also lowers interest rates. Not long before going over to the common currency, Lithuania issued its first euro-denominated bond at the lowest interest rate in the country's history, 2.1 percent, and it expected borrowing costs to go down noticeably for both government and businesses, because that's what happened in Latvia when it adopted the euro in 2014 and because these costs should be lower when conversion friction and currency risk are removed.

Critics argue that peripheral nations' increased ability to borrow is an institutional flaw, not an advantage of the common currency. In a speech earlier this month in Berlin, for instance, Greek Finance Minister Yanis Varoufakis said that, because of trade surpluses in countries such as Germany and the Netherlands, "a tsunami of debt flowed from Frankfurt, from the Netherlands, from Paris -- to Athens, to Dublin, to Madrid, unconcerned by the prospect of a drachma or lira devaluation, as we all share the euro, and lured by the fantasy of riskless risk." He went on:

To maintain a nation’s trade surpluses within a monetary union the banking system must pile up increasing debts upon the deficit nations. Yes, the Greek state was an irresponsible borrower. But, ladies and gentlemen, for every irresponsible borrower there corresponds an irresponsible lender. Take Ireland or Spain and contrast it with Greece. Their governments, unlike ours, were not irresponsible. But then the Irish and the Spanish private sectors ended up taking up the extra debt that their government did not. Total debt in the Periphery was the reflection of the surpluses of the Northern, surplus nations. This is why there is no profit to be had from thinking about debt in moral terms. We built an asymmetrical monetary union with rules that guaranteed the generation of unsustainable debt.

Varoufakis made a valid point about the irresponsibility of lenders, such as German banks, which underestimated the risk of financing governments and companies in other euro area members. The absence of currency risk appears to have prompted them to throw caution to the wind. They've been taught some harsh lessons, however, by taking big haircuts on Greek, Cypriot, Irish and Spanish assets, and that should make them unlikely to err in the same way again.

The debt crisis was caused not by a faulty euro architecture, but by a failure of risk management at financial institutions -- the same kind of failure that precipitated the U.S. mortgage crisis. 

Even though it might be easier for euro member countries to maintain a pretense of economic growth, and perhaps to lower unemployment, if they could devalue their currencies, they opt -- in line with their public opinion -- to at least try to be fiscally responsible. Finland, in deep trouble because of its shrinking pulp and paper industry and the disappointing performance of its tech sector since Nokia lost its global leadership in mobile phones, doesn't want the markka back, even though a devaluation could help. Its new government's program says:

The primary means to handle the financial problems of a euro country are the country’s national measures to consolidate the economy and stabilise public finances. If these means are not enough, the secondary means is the implementation of investor liability.

If everyone in the euro area adopts that view -- and most governments appear to agree with it -- the euro won't fail, even though some "irresponsible lenders," to borrow Varoufakis's term, may still take hits to their bottom lines. That'll be a problem for them, but not for most Europeans, for whom the benefits of a common currency outweigh the costs, and not for central banks, which need the euro as a counterweight to the too-mighty dollar. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net