Another Star Fell on Alabama

Not long ago, financial storm clouds were still lowering on Europe; Greece was holding an election, Spain was holding its breath, and the European Central Bank and Chancellor Merkel were holding all the cards (at least concerning the future of the Euro). Meanwhile, one corporate escape artist was leaving what was perceived to be an economic sink tank.

The giant Airbus consortium, builder of the A-380, the competitor that keeps Boeing’s top brass sleepless in Seattle, decided to open a plant in sunny Alabama. Following similar moves by BMW and Mercedes-Benz, Airbus was the latest in-sourcing event, in a corporate Great Escape out of Stalag Europe that was going on lately, a migratory contre-temps running counter to that job-exporting “O-word,” which both parties have been busy attributing to each other.

The seeking of a high-productivity, low-cost labor force among ‘Bama’s good old boys – which, along with corn liquor, is something not available in the sunny south of Europe – is a trend that might even encourage the 1% to applaud cheap redneck labor, or perhaps even to find a personal tax drop in Birmingham.

It ain’t funny back in Europe, where unemployment is running at levels rivaling the worst days of the Thirties. And the deficits under which most members of the European Union are suffering can only be rectified by re-engineering the Eurodollar vis-a-vis the competing worlds’ strongest currencies, in effect debasing it. The European Central Bank (ECB) is the principal agency able to effect that, but the problem is that unlike other leading financial nations and their respective central banks, the member countries in the Union are not uniform in their opinion as to the measures necessary.

With a single central bank watching over the entire Euro community of nations, difficulties arise from the differing nature of economies as disparate as those of, say, Germany and Ireland. That of course is the fatal flaw in the Union’s financial arrangement. Budget austerity and reform don’t go down well in smaller economies. The Bank for International Settlements, which for laymen might be described as the bankers’ bankers’ bank (the central bank for central banks), has indicated that national banks have reached the limit of their ability to needle economies because interest rates are bumping on zero. Expanding their balance sheets by quantitative acquisition of outstanding debt – which the Fed has engaged in – has the result not only of increasing money supply but accordingly creating an inflationary environment.

In Europe, with a single ECB for all Union members, there is a wide spread in the strength of the member economies, so one-size-fits-all is hardly a necessity in monetary policy. Austerity measures in a nation like Greece would require at least three decades of debt reduction and huge unemployment to achieve the prosperity level of, say, Germany.

There’s little doubt that a deep downgrading of the Euro to near parity with the U.S. dollar could improve the Euro countries’ ability to compete in world markets – exporters love operating within a debased currency relative to their principal markets, i.e. selling into markets with stronger currency. Such a devaluation could work toward the lessening of Europe’s debt crises, all of which would lead to the eventual stability of the Euro. As a matter of fact, this movement is already well along. Four years ago, the Euro was fat and sassy at about $1.60 U.S. A recent quote has it a snick over $1.30.

De-valuing the Euro may be an expensive process, but it’s preferable to the other most visible alternative – the abandoning of the Euro monetary unit altogether and the return to the issuance of individual currencies. Such a move would open a Pandora’s box of difficulties: likely even deep recession, the necessity of individual nations borrowing billions to restore individual nations’ stability, and the resulting choice between greatly elevated tax levels or ruinous inflation.

Still, the likely prospect of the ECB printing Euros of sufficient magnitude to float Spanish and Italian governments and in the event devaluing what has been one of the world’s strongest currencies, doesn’t sit too well with many Europeans. In addition, the fact is that the ECB is dedicated, because mandated, to price stability, as compared with the U.S. Federal Reserve’s current dual objective of straddling the twin problems of lower unemployment and containing inflation. Europeans also can recall the horrors of super inflation.

Angela Merkel has expressed Germany’s reticence over the ECB printing money in order to restore financial equilibrium in both Spain and Greece. It’s pointed out that Germany itself emerged from dire financial straits a few years back through rigorous austerity and biting th budgetary bullet. Missing from that argument, of course, is the qualifier that at that time a robust Eurodollar made the whole exercise feasible.

In addition, Germany, and to a lesser degree most of central Europe recall the horrors of the inflation that beset Germany in the interregnum years of the 1920s, enough to make anyone reject the notion that it should be revisited in order to help Greece particularly out of the current crisis. To which Richard Clogg, an eminent Oxford scholar has pointed out that Germany’s virulent inflation in the Twenties wasn’t a patch on what the Wehrmacht inflicted on the people of Greece during the invasion in 1941. At that time, when Germany, Bulgaria and Italy all submerged the Greek nation, the murderous occupation resulted in the death by starvation of 200,000 Greeks and a scorched-earth policy on their departure leaving over a million homeless, 5,000 schools demolished and an inflation rate 5,000 times as severe as that of Germany in the Twenties. So history tends to make cowards of us all – or at least cautionary partners.

Bygones may be bygones, but German indignation over present-day Greeks bearing the gift of inflation to the rest of Europe appears to be a little misplaced in a historical context. And Greeks can understandably resent being lectured to about potential inflation by Angela Merkel.

The necessary slimming of the Euro in the foreign exchange market may be a boon for employment in low income areas of America, but it won’t be doing our exporters any favor. And that – in foreign exchange as well as the jobs situation – is what makes a market. And if the Euro inevitably takes a hit, among the other exporters – with the soft landing Airbus is planning in sweet home Alabama – Boeing can expect a double whammy.

Bill Annett writes four newsletters: The Canadian Shield, American Logo, Beating the Street, and The Oyster World. He can be reached at: Read other articles by Bill.