WHAT SHOULD WE LEARN FROM EURO TRAGEDY?

If you (we) want to blame all this catastrophes that been formed after the Euro crisis around Europe zone lately, I personally believe that we should look up at Maastricht Treaty or what famously called as ‘The treaty on European Union’. Signed on February 7, 1992 and entered into force on November 1, 1993, this treaty was created by Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and United Kingdom.

As the main gate for entering European Union itself (the treaty) and as the necessity to use Euro as their country’s currency, these countries must comply with some criterias (requirements) which known as ‘Maastricht Criteria’.

MAASTRICHT CRITERIA

-The inflation rate should be no more than 1,5% above the rate for the three EU member states with the lowest inflation over the previous year;

-Budget deficit must generally be below 3% of Gross Domestic Product (GDP);

-The national debt should not exceed 60% of GDP (exception: A country with a higher level of debt can still adopt the Euro provided it’s debt level is steadily decreasing);

-The long term rate should be no more than 2% of the rate in the three EU countries with the lowest inflation over the previous year;

-The applicant country must be a member of The Exchange-Rate Mechanism (ERM II) under The European Monetary System (EMS) for 2 consecutive years (The national’s currency exchange rate should not have devaluated it’s currency during the period).

As the time flew, Britain and Denmark opted out of these Maastricht treaty plans, and Euro finally replaces the old national currency of EU’s countries on January 1st, 2002. After 18 years, how all of these ‘perfect’ criterias mentioned at Maastricht Criteria could not produced strong, constant, and unwavering currency named Euro, like we’ve seen these last months over the region and to be compared with other currencies? How could Euro eventually punched by Dollar or even the stability of China’s Yuan at the stock market?

For information, the print edition of The Economist present the article titled “Chips off the block; Currencies around Asia are more flexible than you think”, under their ‘Asian Currencies’ section’. In this article, said “AMID all the diplomatic ding-dong over China’s yuan, it is easy to lose sight of emerging Asia’s other currencies. There is not much din over the dong, for example. While China has kept the yuan pegged to the dollar since July 2008, ignoring complaints that it is artificially cheap, Vietnam’s currency, the dong, has depreciated by 13% against the greenback over the same period, unremarked and unprotested. South Korea and Taiwan, the only countries besides China ever to be labelled currency manipulators by America’s Treasury, have seen their currencies cheapen by 17% and 6% respectively.”

And the ‘trouble maker’ behind these Asia’s stability called ‘Yuan Block’ by some experts. It stated also inside the article: “China’s neighbours and rivals are reluctant to allow their currencies to rise too far against the yuan, for fear of losing China as a customer, or losing out to it as a competitor. Thus although China accounts for only 19% of America’s imports, its peg, it is argued, frustrates a broader realignment of currencies in the region.”

Leave the Yuan and other Asia’s currency on behold, Euro as the main (single) currency within European Union’s countries (UK Pounds as an exemption), in fact was terribly failed down under the shadows of debts and disintegration of the EU’s leaders itself, like we saw at the Greece bail out case where France, Italy, and Germany seems vague and uncertain whether the Papandreou’s country should get assistance of EU or straightly go to International Monetary Fund (IMF). At very last, France and Italy agree with the bail out proposal, while leaving German chancellor, Angela Merkel alone at this ambiguity. It shows to the world that European leaders seems divided at their economical policies making during this horrible crisis.

In other hand, European Central Bank which was built under Maastrich Treaty to be functioned to set the interest rates, was joined Merkel in opposition to straight-up Greek bail out.

“There shouldn’t be any subsidy element, no concessionary element”
European Central Banking chief Jean-Claude Trichet

Finally, Euro-region governments are betting 110 billion euros ($146 billion) in economic medicine for Greece will be enough to vaccinate the rest of their region from contagion. EU’s Finance ministers approved the unprecedented bailout for Greece after a week that saw the country’s fiscal crisis spread to Portugal and Spain.

The EU and the International Monetary Fund, which is (finally) co- financing the bailout, also agreed to set up a bank stabilization fund. And is that all? No more problems? NO. BIG NO-NO.

“The euro will remain weak and there’ll be more bailouts, for Greece, it means terrific austerity and terrific recession.” Marc Faber, publisher of the Gloom, Boom & Doom, said in a Bloomberg Television interview, in Hong Kong.

Seems that the Europe is on highly demand of another bail out, since another countries go through another high amount of debts. Spain’s budget deficit was the third-highest in the euro region last year, at 11.2 percent of GDP. Portugal’s budget deficit was the fourth-biggest at 9.4 percent of output. Ireland had the highest at 14.3 percent and Greece’s was 13.6 percent (Source : Business Week). The speculation among leaders and economist going strong lately.

“Unless Portugal and Spain proactively take additional measures to bolster their fiscal and growth outlook, markets will be tempted to test whether the EU has appetite for any further rescues after the breathtakingly large commitment made to Greece,” Marco Annunziata, chief economist at UniCredit Group in London.

These all madness creates different solutions from many experts. One of them is Barry Eichengreen, Professor of Economics at the University of California, Berkeley. He wrote his opinion on Project Syndicate’s website titled “Europe’s Historic Gamble”. He mentioned Greece bail out as “Europe’s fortnight mirabilis”. Furthermore, Eichengreen mentioned what he called “Other elements of a proper monetary union”, I will quoting his ideas here:

1.Europe needs a Stability Pact with teeth. This will now happen, because Germany will insist on it. As the European Commission has proposed, the strengthened pact will have tighter deficit limits for heavily indebted countries. Exceptions and exemptions will be removed. Governments will be required to let the Commission vet their budgetary plans in advance.

2.Europe needs more flexible labor markets. Adjustment in the United States’ monetary union occurs partly through labor mobility. This will never apply to Europe to a similar degree, given cultural and linguistic barriers.

3.The euro area needs fiscal co-insurance. It needs a mechanism for temporary transfers to countries that have put their public finances in order but are hit by adverse shocks.

4.The eurozone needs a proper emergency financing mechanism. Emergencies should not be dealt with on an ad hoc basis by 27 finance ministers frantic to reach a solution before the Asian markets open. And European leaders, in their desperation, should not coerce the European Central Bank into helping. There should be clear rules governing disbursement, who is in charge, and how much money is available. It should not be necessary to obtain the agreement of 27 national parliaments each time action is needed.

5.Europe needs coherent bank regulation. One reason the Greek crisis is so difficult is that European banks are undercapitalized, overleveraged, and stuffed full of Greek bonds, thereby ruling out the possibility of restructuring – and thus lightening – Greece’s debt load.

I’m not an economist (yet) and I think I’m not going to be, but what I’m doing here is sharing what I’ve observed lately from the Euro’s crisis. It shows to us all around the world, single currencies can bring you two things : First, it brings you to the equality, egalitarianism. But in other side, it can also brings you to the similarity, in Euro case it’s the resemblance of debts, debts, and debts.

Jakarta, June 8, 2010.