It’s make or break for the embattled eurozone. So many of us were surprised to hear that Estonia will join the single currency in January 2011. A minute later a top UK forecasting group announced that the eurozone needs to break up for the sake of the future economic health and success of the European Union.
Capital Economics’ conclusion is contrary to accepted wisdom that such a move would be a disaster. They are instead convinced a break up would lead to faster growth and spare weaker members of the single currency decades of depression and deflation.
Makes you wonder if the world has gone mad doesn’t it? Why does Estonia still want to join the euro? That they wanted to in the past makes perfect sense. But considering the flaws of the euro mechanism, I can’t help wondering if Estonia’s economy would be in as good a shape today as it is if they had already joined the euro?
Adding new member states to the eurozone is contrary to what Capital Economics ordains. It believes that the return of national currencies, far from being a potential disaster that would result in economic chaos, would enable Europe to break out of a prolonged period of weak expansion.
Christopher Smallwood, author of the report, believes the problem is Germany’s refusal to expand its demand to help countries such as Greece and Portugal grow their way out of difficulty.
He added, however, that a break up would still leave a problem for other core members of the euro area, such as France, which would continue to suffer from the “deflationary bias” in German economic policy unless Berlin agreed to restore the Deutschmark.
Smallwood is convinced that the result of such a move would be a rising currency (the Deutschmark) that would wipe out Germany’s trade surplus, forcing the country to boost domestic demand and hence preventing the country sliding into deflation. “Restoring the mark would lead to the rebalancing of the German economy which cannot occur as long as it remains in the eurozone. “This is the best option for Europe”.
Contrary to that belief, Estonians hope joining the single currency will encourage foreign investment in their economy, with growth falling by 14 per cent last year. It is forecast to grow by 4 per cent next year.
What do you think is the best way forward for Europe? A break-up of the eurozone or for the project to proceed and Estonia joining in 2011? Will more countries joining actually worsen the current problems of the eurozone? Is it worth taking the pain of going through depression and deflation to save the euro? Would reverting to national currencies put Europe on track for growth?
(photo: Flickr – erikasmussen)