The slow European car crash continues. The response from politicians and technocrats is to seek ever-increasing amounts of money to forestall default by the weakest borrowers while hoping that some 'internal devaluation' will solve the longer-term problem of the differences in productivity between European countries and regions. But this disparity is not just the result of Southern European profligacy versus German discipline - it has much deeper roots and is a main cause of the crisis. Germany was not the powerhouse of today until a decade ago. It then reformed its labour laws enough to transform itself from the prime example of 'Eurosclerosis' into a dynamic economy, well placed for growth. Adopting a single currency meanwhile removed the former constraints to this growth - there was no Deutschmark to appreciate inconveniently and no interest-rate hikes from a Bundesbank nervous about inflation. Prosperity took hold and continued unabated. Others, mostly in Southern Europe who had not effected similar labour reform, could no longer rely on depreciating currencies to maintain their competitive position or the helping hand of a dedicated central bank to push cheap money through the economy when it faltered. This set divergence in motion. There was also profligacy of course, but so there was everywhere in those times of illusory plenty.
Now the people of Southern Europe pay a heavy price. A recession created in the banking- sector and ten years of this divergent competitiveness have brought those countries so low that their debts are too big to repay. It might have been possible to recover from recession alone but the means to grow out of trouble have been severely impaired by this divergence. 'Internal devaluation' is proposed as a solution but this really means agonising drops in asset prices and rates of pay and we already see that this will not be gradual but a great sudden step downward. The young will suffer worst as unions defend the rights of their employed members – under-25 unemployment rates are above 50% in some countries. Labour reform seems a distant prospect and is anyway much harder in tough times – the ‘have-jobs’ will fight hard to keep change at bay.
It will get worse as this strong slow force unleashed by currency union pushes the South down while pushing Germany upward. There are however intriguing signs that informal economic activity continues in these Southern countries. Coupons are being exchanged for work and traded for food, rent and some local services. These informal 'coupon currencies' are accompanied by the reappearance of barter - that primitive form of pre-money. There have often been unofficial currencies running in parallel with the principal means of exchange, such as the Brixton, Totnes and Lewes Pounds in Britain and the Time/Bank scheme that has found some popularity in Berlin and parts of Holland. They have generally served as a declaration of independence from officialdom but have also thrived as economic tools, albeit in a modest way so far. Time now to recruit them for the mainstream.
If new local currencies were established in tandem with the Euro in areas that cannot compete internationally it would enable locals to trade with each other. Much important business is still conducted within small local areas and much of the income of the poor is spent on basics such as food, shelter and basic services that may be best sourced and provided locally. Just because a local factory goes bust because it can’t compete with those in Germany doesn’t mean that local people who lose their jobs there cannot work to provide one another with essentials at wages and prices that suit local circumstances and need. This would be a way of ‘managing down’ wages and prices with much less pain than is being caused by the present ‘unmanaged’ process. Some official backing for such regional ‘coupon’ currencies as a temporary way for people to price themselves back into their local markets could avoid the tragedy of sustained unemployment for an entire decade or so of school and university leavers with the life-scarring consequences that will be so dire. By thus making 'internal devaluation' a gradual process that preserves economic activity during the period of adjustment, this pain could be reduced. Eventually, these currencies should be replaced by the Euro on its merits rather than by imposition and if there was still an ongoing need for them in later years, would that be so bad? Berlin and Brixton support alternative types of currency that don’t threaten the official sort, so why couldn’t Barcelona too?