The Euro: What Went Wrong?


The ‘Endless Euro Crisis’ drags on with one inconclusive meeting followed by another and announcements that seem to be good news but the underlying substance and mechanics to support the Euro are never clear.

Whilst the potential death of the Euro doesn’t seem quite so imminent, the Greece and Ireland problem seemed to be eclipsed by the news out of Spain and Portugal.  And then Italy is always lurking just around the corner.  This week we’re following up our previous FAST-FORWARD episode that took you through the birth of the currency with quick overview of how did we end up in this situation?  How did it all go wrong? This is a quick FAST-FORWARD episode that speeds you through the fundamental market changes that occurred post Euro-launch and the behaviors of the different players that followed leading to the Euro-crisis now in its second year, in less than 5 minutes.

We’ve assembled a few poignant clips cut from a full one hour BBC broadcast presented by Robert Peston which originally aired in the UK on Thu 17 May 2012.  A full transcript follows below.  Send us your comments.

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The Euro: What Went Wrong?

SCOTT ARNELL:  I’m Scott Arnell and you’re watching Fast-Forward on GenevaRoadShow.TV. Today we’re continuing our discussion on the Euro.  In a previous episode, we gave you a very quick overview of how the Euro came about.  Today we’re going to talk about how it all went wrong.  We’ve cut together a bunch of quick bits out of a BBC presentation made about the Euro that first aired a couple of weeks ago in the UK.  You enjoy.

LOUISE COOPER:  Then the Euro was created. And suddenly everyone said, “Well, does that mean that Greece’s borrowing costs should be the same as Germany’s?”  Well, it’s one currency.  And that’s exactly what happened.  So the idea of credit risk for each individual sovereign state went out the window.  And every Euro sovereign nation could effectively borrow at the same rate as Germany.  What that did for some of these periphery countries is give them very cheap debt.

ROBERT PESTON:   All this easy money fueled a frenzied property boom, especially in Spain and Ireland.

MICK WALLACE:  People were queuing to buy apartments and houses.  And the price was rising as they were queuing.  The people at the front of the queue got them cheaper than the people at the back.

ROBERT PESTON:  One tricky hurdle for joining the Euro club was that a government’s deficit, the gap between what it spends and tax revenues, had to be 3% or less of GDP.

GUSTAVO PIGA:   I got the sense that in that period, some governments were using derivative transactions to reduce their public deficit so as to ensure that the level of the threshold of the 3% required to enter into the Euro area was respected.

ROBERT PESTON:   The first sign it was all going horribly wrong appeared in the US and spread to Britain.  The collapse of huge banks, such as Lehman Brothers and the Royal Bank of Scotland rocked the global economy. European leaders saw it as an Anglo-American mess caused by the recklessness of Wall Street and the city of London. As this global slowdown began to bite, a new Greek government revealed massive hidden debts. Greece disclosed that government debts were €300 billion Euros, 129% of its GDP.  And the debts were to become bigger and bigger because the global recession led to a slump in the payment of taxes.

LOUISE COOPER:   Greece essentially lied about its debt position.  The political class in Greece manipulated the numbers for years.  They manipulated the numbers to get into the Euro zone, and once they were in the Euro zone, they manipulated them for a good few years afterwards.

ROBERT PESTON:  A new boss for the European Central Bank, Mario Draggi, made a dramatic and unexpected intervention.

MARIO DRAGGI: The Governing Council decided the following: first, to conduct two longer-term refinancing operations, otherwise called LTROs, with a maturity of 36 months.

ROBERT PESTON:   This was a banking rescue unlike anything the world had ever seen.  The ECB provided more than €1 trillion Euros of emergency three-year loans at a miniscule interest rate to hundreds of banks.

DAVID MCWILLIAMS:   LTROs are a cash-for-trash scheme so that the European banks are not forced to pay for their own reckless decisions.  The ECB is giving them cash at 1% for three years.  With that cash, they are investing in government bonds.  So bust banks are propping up bust governments with free money and dodgy collateral and calling it success.

ROBERT PESTON:   In 1973, when Ireland joined the common market, it was a farming economy whose income per head was 40% below the average for Europe.  Here’s what’s pulling the euro zone apart: since 2000, the costs of employing workers in Italy, Spain, Ireland and Portugal has risen between 30%  to 40% more than in Germany, which makes their businesses very uncompetitive.  It means that in order for Spain,  Italy and the rest of them to stop living on credit, living standards for their people may have to drop by a third.

HANS-WERNER SINN:   The bitter truth is that some European countries have become too expensive have to devalue within the Euro, becoming cheaper.  This is a very painful process but there’s no way out.

GEORGE SOROS:   The underlying forces are still driving the countries apart.  The divergence is getting wider. And the perspectives of the various countries are more and more at loggerheads.

ANGELA MERKEL:   As we are in Stuttgart, we should ask a Swabian housewife.  In the long run, you cannot live beyond your means.

ROBERT PESTON:   The Greeks have been told to grin and bear it or get out of the Euro zone.  But a Greek exit could kill the Euro and that could lead to a chain reaction of collapsing banks.

TERRY SMITH:   And Spain now has more unsold housing units than the United States of America, which is pretty startling statistic.  British banks are very international and the British banking system is a very large portion of our economy, much larger than other countries.  And if the guarantees that the government’s given for those British banks were called, which they could be in the event that the Euro zone goes down, we are without doubt the most indebted country in the world.

ROBERT PESTON:   The choice confronting the Euro zone looks profoundly unappealing.  If it survives millions of Europeans face years of squeezed living standards.  But if it were to fall apart, well, households, businesses, banks and governments would face the risk of going bust.  Although the cost of saving the Euro may seem high, the price of letting it collapse, well, that could lead to the kind of economic depression and financial mayhem we haven’t seen since the 1930s.

GEORGE SOROS:   Whether the Euro is held together or not, Europe is facing a lost decade, or more.

Maybe EURO-Determination Is Stronger Than We Think

It’s hard to find any encouraging signs pointing to a resolution of the Euro crisis in the news these days.  That’s why one thing stood out the other night in a reportage by Michael Portillo: everyone he interviewed in Greece or Germany chose to continue with the Euro and rejected the idea of a return to their former national currencies.  And this reportage coming from one of the staunchest Euro-sceptics.

In the BBC’s ‘This World: Michael Portillo’s Great Euro Crisis’ which first aired on 9 May 2012, from the soup kitchens of Athens to former finance ministers to Porsche factory workers, the former UK Conservative Party politician and Cabinet Minister offers interviewees Drachma and/or Deutschmarks in place of their Euro – but to no avail in either Greece OR Germany.

Whilst this was a comprehensive hour-long presentation of the origins and current state of the Euro crisis, we’ve assembled a brief montage of just the bottom-line responses of the various individuals interviewed to Portillo’s repeated question and their reasoning.  In view of the recent election results and reporting on the current political environment in Europe seems to lean towards nationalism and anti-Euro rhetoric, the stated commitment of the ‘man in the street’ to the future of the Euro, both in Greece and in Germany, shows a determination not often reported today.  In fact the only negative response was from a banker who supports the Euro, but only without Greece!  With the enormity of the problems at hand, determination and willingness to do a tough slog by the man in the street in the Eurozone will be the only way out of this mess.  Maybe there’s more of this out there than we think.

You can watch the entire hour long show here on BBC iPlayer for about a week, but only if you’re in the UK.  If you’re not, well… at least you’ve seen these clips here… CLICK ON THE REQUEST CONTACT BUTTON to subscribe to our mailing list and we’ll let you know whenever we’ve posted a new video.