The Euro: What Went Wrong?

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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.

*******************************VIDEO TRANSCRIPT*******************************

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.

Why the Euro? From Concept to Currency

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The ‘Endless Euro Crisis’ drags on with another inconclusive meeting in Rome, where Eurozone leaders vowed Friday to defend the Euro with ‘all means necessary’, but with absolutely no agreement on what ‘all means’ actually means. Consensus is quickly growing that in order for the Euro to survive, either the smaller member countries will have to start leaving the Eurozone, or Europe will effectively have to become one country.

Whilst the potential death of the Euro doesn’t now seem quite so imminent given the recent formation of a new coalition government in Greece, we thought it would nevertheless be timely and relevant to put things in context and provide you with a quick look at the birth of this currency, why the Euro exists and how it came about in the first place with a quick FAST-FORWARD episode that speeds you through the history and background of the Euro starting with Winston Churchill’s vision of a United States of Europe, 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.

VIDEO TRANSCRIPT:

Scott Arnell: I’m Scott Arnell and you’re watching Fast Forward on GenevaRoadShow.TV.  On Fast Forward we try to bring you a very quick high level overview of a current topic.  Today we’re talking about the Euro.   I just came back from a couple of weeks in Asia and many of the people that I spoke with feel like they’re helplessly watching a slow-motion train wreck here in Europe relative to what’s going on with the Euro.  It also became clear to me that many of the people I spoke with didn’t really understand how the Euro came about – probably because they’re younger than me.   A LOT younger.  So in this episode we’ve cut together a few short bits from a BBC presentation about the Euro made a couple of weeks ago in the UK presented by Robert Peston.

David Marsh: Three times great conflicts had erupted from French and German soil. And the idea was after the war that this should never happen again. And money as well as trade and political rapprochement they were all keys to that particular door. Winston Churchill was clearly very keen that France and Germany should come together and no longer cause a problem for everybody else.

Winston Churchill: This is not a movement of parties, but a movement of people. Europe can only be united by the heartfelt wish and vehement expression of the great majority of all the people of all the parties in all the freedom-loving countries. No matter where they dwell or how they vote.

Robert Peston: Churchill was a promoter of the United States of Europe, though with Britain on the outside. The UK wasn’t one of the European pioneers which signed the Treaty of Rome in 1957. At the heart of the new European Community stood the historic enemies: West Germany and France together with Italy, The Netherlands, Belgium, and Luxembourg. As these countries removed barriers to trade, the idea of a single European currency was always in the background but made explicit in the late 1960s.

In 1981 François Mitterrand was elected president of France.

Elisabeth Guigou: During the war, he had been a prisoner in Germany and he escaped three times. Each time he met Germans who helped him. Afterwards he became obsessed with the idea that there should never be another war and that Europe should unite.

Robert Peston: A year later Helmut Kohl became Chancellor of West Germany.

Prof. Hanns Jurgen Kusters: Kohl grew up only a few kilometers from the French border. As a youth he lived through the second world war. He lost a brother during that time. He believed that there should never again be a war amongst the peoples of Europe.

Lord Lamont: Kohl, because of the history of Germany, wanted to anchor Germany into Europe to make war impossible. And Mitterrand had the same objective. And that is what the Euro, and the European Union to some extent, are all about.

David Marsh: The common vision was to have a single currency from the Atlantic maybe to the Urals that in some magical way would do everything.

Robert Peston: The end of communism brought down the Berlin wall and the face of Europe was about to change forever. But a unified Germany would be an even stronger Germany. When it became clear that the momentum towards German unification was unstoppable, the French president, François Mitterrand, needed a way of constraining German power.

David Marsh: The deal that was done, was that the Germans once unified would then do everything  they could to embark towards a single currency.

Robert Peston: For the French, monetary union was as much about politics, about the balance of power within Europe, as about economics. The idea was to strengthen the institutions of the European Union relative to member countries so that the growing power of Germany could be held in check.

Europe’s leaders assembled in a small Dutch town to agree a treaty that would shape and shake the continent.

David Marsh: It was an impossible dream that you could build a single European currency without a single European state. Everybody knew that it was a risk. Everybody knew that you were putting the cart before the horse.

Lord Lawson: You cannot have a monetary union that works without a fiscal union. It was arrogant because they thought that that way they could override the democratic veto and it was irresponsible because they didn’t say “Well this is a high risk project” and I think that was a gamble, if you like, which should never have been taken.