Interview With Historian Hans-Joachim Voth: 'The Euro Can't Survive in Its Current Form'

Interview by Alexander Jung and

Historian Hans-Joachim Voth gives the euro only another five years unless the euro zone is transformed into a full transfer union with massive redistribution. The continent is too culturally different to warrant a single currency, he says, adding that it would be best if Germany and other stronger economies left the euro zone.

Demonstrators in Madrid protesting against austerity measures in July.

Demonstrators in Madrid protesting against austerity measures in July.

SPIEGEL: Professor Voth, how much longer do you think the euro will survive?

Voth: Five years. The euro can't survive in its current form. We could, of course, make a full-fledged transfer union out of the euro-zone countries, complete with euro bonds and massive fiscal redistribution. In that case, we would have a different euro than the one that was originally conceived and promised to German voters. In the end, if the heads of state and government don't want that, it's likely that the euro will have to be dissolved.

SPIEGEL: Why can't the euro survive?

Voth: Even bad economic arrangements can be kept going for a long time. But the real questions are: Whom does that help? How long can one stand the pain? And what's the use? The euro can technically survive, but so can the never-ending attacks on the bond markets that are increasing the pain. But that just exacerbates the fundamental problem: that the main shock absorber has fallen away in the countries with very rigid labor markets …

SPIEGEL: … because these countries can no longer manipulate the values of their currencies to meet their individual needs.

Voth: Before, if Spain had gotten stuck in the kinds of difficulties it has today -- unit labor costs are too high, growth is too low, and there is enormous unemployment -- the peseta would have simply been devalued by 20 percent. In those days, Spain only had to change a single price -- that of its currency -- in order to make itself competitive again, and the market would generally help out as well. Cars could keep on being built in Pamplona and Seville. Houses on the Costa Brava were still affordable. There were no forced wage cuts in Spain, and prices remained stable. That's it.

SPIEGEL: But, these days, the European Central Bank (ECB) and the International Monetary Fund (IMF) force countries like Spain to implement reforms. Why do you think this strategy won't lead us out of the crisis?

Voth: In 2009, in the middle of the crisis, when the Zapatero government was already making half-hearted reforms, wages went up 4.3 percent in Spain. There's no reason to believe that the scale of reforms currently needed to move things forward economically is politically feasible.

SPIEGEL: Which reforms do you consider absolutely necessary to consolidate the country's economy?

Voth: The government needs to overhaul the budget. But unit labor costs also have to drop by 10 to 15 percent.

SPIEGEL: Germany has been moderately successful at doing this since the beginning of 2000. Why shouldn't it work for Spain, as well?

Voth: In Germany and even in the Netherlands, the unions are fairly reliable when it comes to cooperating, and governments in both countries can expect to have consensus. This consensus-based solution doesn't exist in Spain. Here, you don't have a union movement like the DGB (German Confederation of Trade Unions), which accepts that one can't distribute more than one makes. We need to start taking the cultural differences in the EU seriously. Spaniards just aren't like the Dutch, and Greeks are not Germans.

SPIEGEL: Is it your position that the solution to this extended state of crisis is kicking a country out of the EU?

Voth: It depends on how the EU wants to solve the crisis. If it wants to become anything more than just a transfer union, some countries need to leave the euro zone. Both are technically feasible.

SPIEGEL: Which country should give up the euro and return to its national currency?

Voth: It would be simpler to have the stronger countries veer off. It would be much easier for Germany than for Greece because it's always the banks that are the problem in such cases. The second the country that is about to have a soft currency steps out of the euro network, all of its citizens are going to plunder their accounts and ask for their money in cash. Then the banking sector is broke. And whenever a country doesn't allow people to drain their accounts, as was the case in 2001 in Argentina, consumption and investments collapse.

SPIEGEL: Germany wouldn't have this problem. But what are the consequences a hard-currency country would face?

Voth: People across the world would line up to exchange their money into Deutsche Marks. Banks would lose money in their foreign currency investments, but they would get even more deposits for nothing. That would lead to an appreciation (of the Deutsche Mark). One can argue over whether that would be good or bad for Germany. And, in this case, the national currency could once again be used as a buffer for cushioning crises.

SPIEGEL: Germany's export-driven economy would run into serious problems if the mark went up in value.

Voth: That's true. But, at the same time, we can't ignore the fact that imports from around the world would become cheaper. And foreign assets -- companies or real estate -- would become much cheaper for German investors.

SPIEGEL: Wouldn't abandoning the common currency sound the death knell for the entire EU project?

Voth: I believe that the consequences of ending the euro have been overstated. Not every dumb economic idea needs to be defended to the bitter end. Europe is infinitely more than the European Union, and the European Union is infinitely more than the euro.

SPIEGEL: Why do you think the euro was a dumb idea?

Voth: Because, at its core, it is a bad solution for a nonexistent problem -- a political object of prestige with massive economic disadvantages. Everyone thought the common currency would cause all of the structural differences in the euro-zone countries to automatically disappear. But, after 2000, the low interest rates in the euro zone artificially fuelled growth in the weaker countries and caused real estate prices to skyrocket. This kind of speculative bubble is fun while it lasts. But every party comes to an end eventually. And then comes the rude awakening: Growth slows down, and unemployment rises. Since the banks have given out too many loans, they become a brake on growth. This causes an increase in the structural divergences that were actually supposed to decrease. The euro can't survive for long without having much more redistribution between richer and poorer member countries or much more flexible economies. And neither of those things is politically feasible.

SPIEGEL: Attempts to tackle the crisis with austerity measures have met with social rejection and have triggered political crises. Is that the price that has to be paid for instituting reforms?

Voth: Over the next five years, as long as German taxpayers don't write the bond markets a golden check, there's going to be one cost-cutting program after the other in many European countries. This could be accompanied by increasing social unrest. Austerity and anarchy are closely linked. We've been able to unambiguously establish that with a minor study looking at the period between 1919 and 2009.

SPIEGEL: Are you thinking perhaps of Heinrich Brüning, Germany's chancellor between 1930 and 1932, whose rigid belt-tightening policies drove the country into recession?

Voth: Brüning's cost-cutting programs didn't trigger the global economic crisis, but they did make the effects in Germany massively worse. What we're interested in is the impact on social harmony. Jacopo Ponticelli and I didn't just focus on German history; instead, we looked at the histories of 28 European countries over the last 90 years. It is a fact that savings amounting to just one percentage point of GDP are accompanied by social unrest. And when they reach two or three percentage points, it massively increases.

SPIEGEL: And these kinds of social explosions just exacerbate the economic situation even more.

Voth: Any time a country becomes politically instable as a result of growing economic insecurity, you'll see a sudden drop in growth. This creates a snowballing effect: Pressure from the bond markets causes a reduction in government-provided social services, which leads to street demonstrations. This causes mounting insecurity, and the economy contracts -- and because the economic situation gets more dramatic, the state has to make even more cuts.

SPIEGEL: Yet another result of this process is the decimation of small and medium-sized businesses, which are supposed to buoy democracies. Where has the crisis progressed the furthest?

Voth: In Greece. If all the envisioned cuts are really made, things will reach Brüning-esque dimensions. Of course, social spending in today's Greece is on a completely different level from where it was in Germany in 1930, and the state continues to do much for the poor. But the changes would have dimensions similar to those in the final stage of the Weimar Republic.

SPIEGEL: Do you believe these deep cuts in social spending can save Greece?

Voth: If Greece is really going to be able to pay back its debts, it's going to have to go far beyond what Brüning expected from Germany. Even if you make very optimistic assumptions, the country will have to run budgetary surpluses of between 6 and 8 percent of GDP for decades while still servicing its foreign debt, primarily at European banks.

SPIEGEL: That is bound stir anti-European feelings.

Voth: For the southern Europeans, the euro has always meant: we've married into money. They won't give up what they've attained.

SPIEGEL: What is the alternative to consolidating by cutting welfare spending?

Voth: There is less unrest if the state looks around for additional sources of revenue. It is much easier and less risky to raise taxes rather than massively cut spending -- especially if the country has a fragile social equilibrium.

SPIEGEL: What taxes are you referring to?

Voth: Consumer taxes like value added tax, tobacco tax or fuel tax. People live in suburbs or just outside the city and they have no alternative to driving by car.

SPIEGEL: But with higher consumer taxes you won't tap the biggest source, the really wealthy. US billionaire Warren Buffet is constantly demanding to pay more taxes.

Voth: The problem isn't Warren Buffet, the problem is the people who are as rich as Warren Buffet but who don't feel like paying tax. They simply emigrate to Zug or elsewhere in Switzerland if they are facing higher taxes. New laws may feel good but they usually don't generate revenues.

SPIEGEL: Does that also apply to wealth tax?

Voth: I like it but it's only a solution if it is equally high in all countries. But I don't understand at all why non-earned income, for example from inheritance, is taxed at a far lower rate than earned income. The children of rich parents have many advantages; they don't have to inherit many millions as well.

SPIEGEL: The euro countries have opted for cutting government spending rather than increasing taxes. The European Central Bank is purchasing the bonds of ailing countries, and euro bonds may be introduced, despite politicians' vows not to do so. Where will it all end -- in a surge in inflation?

Voth: A bit more inflation is quite possible. We know a lot about how the expectation of rising inflation actually fuels inflation. If people expect their money to be worth less tomorrow than it is today, they will spend it. Panic reactions are possible. But at the moment there are only peripheral signs of this happening, such as the hunt for top-quality real estate in big German cities such as Hamburg. They are already incredibly expensive. But inflation refers to a general increase in price levels. We're still far off that, and I'm not worried about it.

SPIEGEL: How long do crises such as this tend to last on average?

Voth: Crises like this are rare. The global economic crisis and some deep slumps -- such as in Latin America in the 1980s and in Asia after 1997 -- are comparable to today, but that's all. The data tell us that economic crises caused by a real estate bubble last around seven years. But there is also Japan, were the crisis has gone on for 20 years. Or America: it has only just reached the economic output it had in 2007, but should be much further ahead given its potential.

SPIEGEL: You give the euro another five years -- what will Europe look like then, in your opinion?

Voth: I can imagine a world where there will a left-over euro: with France, Italy, the Mediterranean countries, perhaps Belgium as well. Apart from that the old Deutschmark zone will return, comprising Germany, Austria and the Netherlands, perhaps Denmark as well, perhaps Finland, which have no problems conducting the same monetary policy as Germany. We had a similar system during the European Exchange Rate Mechanism ERM. That was the optimal system, and then we gave it up for the euro.

SPIEGEL: Professor Voth, thank you for speaking with us.

Interview conducted by Alexander Jung and Gerhard Spörl.


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About Hans-Joachim Voth
  • Bjoern Goettlicher/ DER SPIEGEL
    Hans-Joachim Voth, 43, studied at Oxford before working for the McKinsey corporate consultancy. He is Research Professor at the Economics Department of Pompeu Fabra University in Barcelona. He and fellow economic historian Jacopo Ponticelli published a study on "Austerity and Anarchy" this year.

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