When something is unsustainable it must come to an end.
The euro is not currently in acute crisis. The disease is in remission but it is still there, festering in the background and waiting for the next acute episode.
As currently designed, the euro is clearly unsustainable. There is widespread agreement about that. What is not clear is how the issue will be resolved.
There are several options. The first is that the EU will collectively manage to keep the euro going as a chronic European disease. Nothing much will change. We will lurch from one crisis to the next and some eurozone economies will continue their steady relative decline.
Another option is that the eurozone will shrink to a few countries for whom a single currency may be sustainable. However, beyond Germany and the Netherlands (and possibly Finland, Luxembourg and, at a push, Belgium), it is hard to see many more countries that would fit into this category.
A third option is an orderly or disorderly collapse of the currency. This could be triggered by a number of factors. A revival of the Greek crisis followed by an unsustainable rise in interest rates for Italian, Portuguese and Spanish government bonds; the election of Marine Le Pen and/or Beppe Grillo; an aggressive protectionist policy in the US; or a myriad other potential unpredictables.
Some will argue that this is all too pessimistic. Those who believe that should try sitting in the chair of the president of the European Central Bank – the ultimate defender of the euro. The bank has launched and is maintaining a substantial quantitative easing programme in an attempt to kick-start stagnant eurozone economies.
Currency hedging will be an important element to bring a degree of stability
Yet the impact of this programme in Germany is becoming politically toxic. German inflation has jumped to 1.7 per cent (and we all know Germans’ deep-seated angst about inflation). House prices in Hamburg have soared by 70 per cent in the last five years and Munich is now the fifth most expensive housing market in the world.
Prudent German savers are earning zero interest and are seeing the value of their savings being inflated away. Germans are convinced that their steady and reliable economy is now being forced by others into boom and bust cycles.
“The perception is that we are being dominated by foreigners” according to Clemens Fuest of the IFO Institute in Munich. It will not be long, maybe, before this translates into the German version of “Take Back Control” – the powerful slogan that drove the Brexit campaign. The political consequences may become uncontainable over time.
But the ECB is in an impossible position. It is not possible for the bank to run a monetary policy that fits Greece, Italy and Spain as well as Germany and the Netherlands. The only policy question that it can possibly address is which approach will be the least politically damaging at any one time: running a monetary policy for Germany and letting Southern Europe stagnate (and possibly collapse); or supporting Southern Europe and letting the Germans get ever angrier. The latter seems to be the current choice. Reasonable. In the short term it seems the less risky option.
For those who believe that this will all come right in the end, a few numbers. Professor Hans-Werner Sinn of Munich University estimates that it would require inflation averaging 4.5 per cent in Germany and zero in Southern Europe for 10 years to rebalance monetary union. Good luck with that.
For policymakers this is a headache of gigantic proportions. There are ways it could be approached but none that would not generate significant political resistance somewhere.
But what are the implications for business?
The first is inflation. The inflation rate in Malta averaged two per cent from 2005 until 2016, reaching an all-time high of 5.74 per cent in October of 2008 and a record low of -1.08 per cent in April of 2007. Currently inflation is running at around one per cent or so and is forecast to fall slightly. But that may not come to pass. Inflation may well rise significantly with consequences for some sectors of the economy such as tourism.
Second, business needs to prepare itself for further episodes of euro crises. That will have implications for public expenditure (more bailouts) and for export-related industries.
Third, euro exchange rates will likely remain volatile and unpredictable. For businesses with significant contracts in non-euro currencies such as the pound and the US dollar, currency hedging will be an important element to bring a degree of stability.
Finally, in the medium to long-term, it may be worth going through the exercise of working out what life would look like in a post-euro world. That will not happen tomorrow or the day after. But eventually something is bound to give. The only questions are what and when. Sadly, these questions are unanswerable so businesses need to be prepared for all eventualities.
Malta will be hoping that the next euro crisis does not happen during the six months of its presidency. But happen it almost certainly will. Some time.
Joe Zammit-Lucia is a trustee of radix.org.uk, a think tank for the radical centre, and co-author of The Death of Liberal Democracy?