The euro is stable
There is much talk about a ‘euro crisis’. But our currency is in no crisis. Contrary to the general belief the euro is stable – both externally, i.e. the euro exchange-rate is relatively high in spite of normal fluctuations – as well as internally, i.e. the average rate of inflation is lower than before the introduction of the euro. Thus, we are not dealing with a crisis of the euro but with a sovereign refinancing crisis of individual euro-area countries and – due to the lack of political will to take effective action – a crisis of the entire monetary union.
The triggers of the crisis can be traced back to the bursting of the housing bubble in the United States which culminated in the collapse of the global investment bank Lehman Brothers in September 2008. It soon turned out that many European (especially German and Irish) banks owned non-performing U.S. real estate loans in the form of so-called ‘toxic assets’. As a result of the implied dramatic loss of confidence among banks the interbank market seized up and monetary flows stalled, while world trade and global industrial production collapsed. When it became clear that the recession could take dimensions similar to those of the Great Depression in the 1930s, governments and central banks began to support the economy through unprecedented economic stimulus measures. In particular, banks received financial assistance to an extent that was unthinkable before.
When the worst seemed to be over, the weaknesses of the (public) rescuers became apparent: Empty coffers, high debt and a faltering economy. The desolate situation of public finances across advanced countries sapped investor confidence, while the actions of speculators and credit rating agencies exacerbated the already severe situation. High-debt countries with an own central bank (e.g. the U.S. or Japan) got away with a black eye, as they were able to ease the debt burden at the price of higher inflation. Countries within the monetary union faced the much more serious risk of a sovereign default – unless the ECB or the community of euro area countries would step in and bail them out.