The Rupp Report: Quo Vadis, Euro?

The euro is the official currency of the European Union (E.U.), used in 16 states of the EU and
five other countries. At first, it replaced the European Currency Unit (ECU) used for accounting,
but since January 2002 the euro is also a cash denomination, and is considered the
second-most-important currency after the U.S. dollar.

The EU is based on a treaty with some regulations. In the first years, the euro gained
strength and became a very strong currency. After the financial crisis in 2008 and 2009, new fears
appeared on the horizon. In recent months, the euro has been under constant pressure, and its
dropping value against the US dollar and the Swiss franc is alarming. It all started in Greece, but
Greece is definitely not the key issue in the crisis. Probably, it was just a coincidence.

Europe — An Artificial Power?

It seems that there are two main problems that occurred in Europe, bringing the euro in the
last few days to its present low value compared to the U.S. dollar and the Swiss franc. On the one
hand, it is more an institutional problem from bringing all the different countries under one E.U.
umbrella to speak the same language, at least from an economic point of view. The E.U. was built on
the concept that Europe is one of the strongest marketplaces, if not the strongest marketplace, in
the world. The so-called Lisbon Strategy from 2000 had the goal of making Europe the world’s most
competitive economic power. This aim has proven wrong. The textile industry in particular
demonstrates where the music is playing, mainly in Asia, and not in Europe anymore. Some experts
say that the competitive advantages of the Asian markets were also recognized by the international
finance markets in identifying the weak points and — as everybody knows today — gambling against
Greece in general and the euro in particular.

Devastating Results

The results have been devastating. Some days ago, the euro dropped below the exchange rate of
US$1.20, its lowest value against that currency in more that four years. On the other hand, the
Swiss franc is at a record-high against the euro, which is valued below 1.40 Swiss francs. But why
Greece, and not the United States and the dollar, where the whole financial crisis started? In the
United States, the national deficit is worse than that of the Eurozone countries. The national
economies of the G7 countries recorded an average annual deficit of 10 percent, and the Eurozone
countries, some 7 percent.

So what is the institutional problem of the E.U.? The fact is that Greece and other countries
did not publish the real statistics about their debts and the pressure increased on the euro.
Bluntly speaking, Greece is cheating its European partners by giving false statistics, counting on
some “first-aid” from the European Community.

Some people say it’s a colossal “constructional defect.” Maybe. But the E.U. is not the
political body that its founders had in mind. It’s the contrary: Since the current generation of
European leaders came into power, the E.U. has become more intergovernmental. The power is not in
the hands of the European Parliament, but in the hands of the chefs d’etat and the states
themselves. This leads to very long decision avenues, and they are not flexible in order to be
active in crisis.

Limited Power In Brussels

But the people of Europe can’t complain. That was exactly what they wanted in their elections
and European treaties. More power for the European Parliament was strictly opposed by most people
in the different countries. Hence, the decision-making process has become very slow. And now, the
euro is in crisis and the European governments are not capable of making fast decisions. This has
led to an even worse situation: Europe is a victim of its own circumstances, and today, it is
duller than ever.

The EU said it has learned the lesson and will now start the necessary reforms, but any
intervention to focus and integrate more power on Brussels is impossible. Even the
European-friendly Germans don’t agree to any further increase of the political power of the
European Parliament.

Vicious Circle

It is a vicious circle and the challenge of the century: In a few years, Europe will be more
over-aged than ever, which requires big money for retirement programs. Asia has more power than
ever; Europe’s old social structures must be reformed in order for it to become competitive again.
All this needs a lot of money.

On the other hand, the expenses should be limited and national debts, therefore, reduced,
which requires tough austerity programs. The Lisbon Strategy failed completely. Individual and
structural weaknesses are always the strength of the opponent. This is not the problem of Greece
but of Europe as such. And the international finance markets are very quick to find opportunities.
And this is never a coincidence.

June 8, 2010