Via The Cato Institute, Vaclav Klaus, president of the Czech Republic writes on his view of the future of the Eurozone.

His main assertion in the article is that the Eurozone will not collapse due to the huge amount of political capital invested in the project but that will come with it’s own financial price tag in terms of bailouts and lower growth for the whole region :

Of greater interest to non-experts and politicians (rather than economists) is the question of the collapse of the eurozone as an institution. To that question, my answer is no, it will not collapse. So much political capital had been invested in the existence of the euro and its role as a “cement” that binds the EU on its way to supra-nationality that in the foreseeable future the eurozone will surely not be abandoned. It will continue, but at an extremely high price that will be paid by the citizens of the eurozone countries (and, indirectly by those Europeans who have kept their own currencies).

The price of maintaining the euro will be low economic growth in the eurozone. Sluggish eurozone growth will result in economic losses in other European countries, like the Czech Republic, and in the rest of the world. The high price of the euro will be most visible in the volume of financial transfers that will have to be sent to eurozone countries suffering from the biggest economic and financial problems. The idea that such transfers would not be easy without the existence of a political union was known to German Chancellor Helmut Kohl back in 1991 when he said that “recent history, and not just that of Germany, teaches us that the idea of sustaining an economic and monetary union over time without political union is a fallacy.”³ He seems to have forgotten it, unfortunately, as time went by.

The problem with restricted growth in the future, of course, being less money available to pay down the already huge debts built up by European governments, not just from the recent bailouts of their own economies but also from the socialist sending policies that most have embarked on in recent years with the UK being a prime example.

He also illustrates a very interesting point which I have not come across before which is that growth in the Eurozone has already been lower than the combined growth achieved by its members before monetary union :

It is absolutely clear that nothing of that sort has happened. After the establishment of the eurozone, the economic growth of its member states slowed down compared to the previous decades, thus increasing the gap between the speed of economic growth in the eurozone countries and that in major economies such as the United States and China, smaller economies in Southeast Asia and parts of the developing world, as well as Central and Eastern European countries that are not members of the eurozone. Since the 1960s, economic growth in the eurozone countries has been slowing down and the existence of the euro has not reversed that trend. According to European Central Bank data, average annual economic growth in the eurozone countries was 3.4 percent in the 1970s, 2.4 percent in the 1980s, 2.2 percent in the 1990s and only 1.1 percent from 2001 to 2009 (the decade of the euro) (see Figure 1).¹ A similar slowdown has not occurred anywhere else in the world.

Not even the expected convergence of the inflation rates of the eurozone countries has taken place. Two distinct groups of countries have formed within the eurozone — one with a low inflation rate and one (Greece, Spain, Portugal, Ireland and some other countries) with a higher inflation rate. We have also seen an increase in long-term trade imbalances. On the one hand, there are countries with a balance of trade where exports exceed imports and, on the other hand, those countries that import more than they export. It is no coincidence that the latter countries also have higher inflation rates. The establishment of the eurozone has not led to any homogenization of the member states’ economies.

The global financial and economic crisis only escalated and exposed all economic problems in the eurozone — it did not cause them. That did not come as a surprise to me. The eurozone, which comprises 16 European countries, is not an “optimum currency area” as the elementary economic theorems tell us it should be. The former member of the Executive Board and chief economist of the European Central Bank Otmar Issing has repeatedly pointed out (most recently in a speech in Prague in December 2009) that the establishment of the eurozone was primarily a political decision.² That decision did not take into account the suitability of this whole group of countries for the single currency project. However, if the existing monetary area is not the optimum currency area, it is inevitable that the costs of establishing and maintaining it exceed the benefits.

So, not only do we have lower growth from the Eurozone being forged as a political statement, we have lower growth in future as a result of saving political face by not allowing the problem to go away.

Whether this will result in the speeding up of the financial union of the Eurozone and hence, the beginnings of a European Superstate remains to be seen but whatever the outcome, it will result in increased costs and even less money to pay for our huge debts.

The full article is well worth your time.