The Eurozone – the collection of countries which use the Euro – is in crisis yet again. Many across Europe are beginning to question the wisdom behind the single currency, with some states at risk of falling out of it altogether. But the intentions which underpinned the EU’s introduction of an international currency that bound together its member states were positive. A unitary currency removes the need for conversion fees and mitigates the impact of variable exchange rates, thus making large-scale trade cheaper, and removing prohibitive costs that prevent small-scale international transactions.
But the presence of a central issuing authority, and the inability of Eurozone countries to make their own structural adjustments to their currencies in response to their individual economic circumstances, has hampered the bloc’s ability to respond to economic difficulties. Digital currencies offer a way out of this dilemma, and can provide both immediate and long-term relief for those most affected by the ongoing state of crisis: the people in those indebted nations.
Read the full story below.
It is 1958, and across Europe the dust is settling following the greatest global conflict the world has ever known. The defeat of Nazi Germany has wrought its toll on European nations, and fear of resurgent fascism and an increasingly powerful communist bloc are leading European nations towards ever closer integration. In this environment, six countries form the European Economic Community (EEC), convinced that economic co-operation and strengthened trade links are the key to preventing future conflict. Fast-forward to 1998, and a momentous decision is taken: the newly renamed European Union (EU) introduces the Euro, an international currency which ties all but two of its members (the exceptions being the UK and Denmark) in a remarkably resilient fiscal union.
The Euro is not the first international currency – the East Caribbean Dollar predates it by some 33 years – but it is the most successful, and covers the most diverse range of states, from economic giants like France and Germany to developing nations such as Slovakia and Montenegro. Despite its many problems, the Euro’s basic aim of facilitating trade and the movement of people throughout the continent is admirable. But the Euro has, in recent years, suffered from structural problems which were exposed by the 2008 financial crisis. Interest rates are amongst the most intractable of these problems. The European Central Bank controls interest rates covering 23 countries, trying to respond to 23 highly distinct economies.
Differences in economic complexion, inflation and labor costs between these 23 nations have resulted in a Eurozone which has struggled to compete – in terms of growth and productivity – with other developed economies. With each of these states unable to adjust their currencies to reflect these imbalances, these issues take a long time to correct.
If only, the leaders of many Eurozone states must sigh, there had been cryptocurrencies back in 1998. Digital money offers many of the advantages that the Euro aimed to offer, without the requirement for states to rid themselves of the fiat currencies that serve to provide sovereign governments with greater control over their national economies.
While states still have good reasons for favoring distinct national currencies, the world is becoming increasingly economically integrated – and not just with their continental neighbors. The internet has enabled businesses to extend their reach across the globe, so that consumers in Australia can purchase maple syrup direct from its Canadian source almost as easily as Canadians themselves. But while technology facilitates such exchanges, such trade often remains prohibitively expensive. Small scale international transactions still require transaction fees, and suffer disproportionately from unfavorable exchange rates.
In this example, the appeal of an international currency is clear, eliminating the problems caused by conversion fees and unstable exchange rates. But while both Australia and Canada have the Queen’s face on their money, their economies couldn’t be more different. While Canada’s economy is heavily dominated by the service industry, and her largest trading partner is the US, Australia’s economic base is more widely mixed, with a greater reliance on mining, manufacturing and Chinese exports. Thus, the conditions which promote growth in each country are markedly different. Economic union, therefore, would likely have seen both economies come out of the 2008 financial crisis in a much worse state than they actually managed.
Big Ideas and the Law of Unintended Consequences…
The historical record is littered with the remnants of big ideas that promised to change the world, only to fall prey to the law of unintended consequences. Examples range from disastrously short-sighted foreign policy decisions like the “guilt clause” in the Versailles Treaty – a treaty so harsh in its terms that it caused much of the German resentment that played such an important role in bringing the Third Reich to power – to policies such as the U.S. luxury tax on yachts in the early 1990s that ended up harming middle class yacht-builders rather than the rich yacht-buyers the tax was designed to target.
The fact is that policy makers all too often get so caught up in bringing their big ideas to life that they end up overlooking the potential unintended consequences of those decisions. As a result, those decisions ultimately plant the seeds of their own eventual destruction. In the case of the Euro, the very aspects of the united currency that seemed to offer so much promise for the member states who adopted it are some of the same characteristics that are now threatening its stability.
Just look at all that has happened in the Eurozone since the financial panic and credit crunch of 2008 began this cascade of disastrous events. Since that crisis began, the zone has seen peripheral members like Greece, Spain, and Cyprus – among others – announce that they had no ability to either refinance or repay their massive debts. At the same time, they lacked the ability to even provide bailouts for their native banks without seeking the assistance of other financial organizations like the IMF (international Monetary Fund) and the ECB (European Central Bank).
To be sure, those nations’ debts were merely the straw that broke the proverbial camel’s back. There were many other factors involved, dating from the aforementioned 2008 financial crisis to the subsequent recession, global property bubble, and crisis in the real estate markets. Add to those things the rather questionable fiscal and budgetary policies of those member states, and it’s easy to see why those nations found themselves sitting on the edge of financial oblivion.
Forgetting What Really Matters…
It’s also easy to become overly focused on the global picture, including the indebted nations’ disastrous financial policies, and miss why all of this really matters. While it is in some ways comforting to adopt an overly objective view of this entire situation and speak about sovereign debt issues as though nations were but cogs within a larger and impersonal machine, that does a disservice to the real victims who find themselves at risk as a result of events that are often beyond their control.
The Human Toll…
What often gets overlooked in these dry discussions of fiscal and monetary policy, Eurozone planning, and efforts to salvage the Euro is the fact that the real tragedy here is what has happened to the people of Greece - and what is likely to happen to the people of similarly situated Eurozone member states if the EU is unable to solve this problem. For half a decade now, the people of Greece have been enduring suffering on a scale that seems almost unimaginable during this time of peace. Living standards have plummeted, half of the nation’s young are unemployed, and the national unemployment rate stands at more than 25%.
And the forecast for the future is even gloomier. As of last year, about 44% of the Greek population was estimated to be below the official poverty level. The Organization for Economic Co-operation and Development reported this year that almost one out of every five Greek citizens doesn’t even have enough money on hand to pay for food each day. Homelessness has been on the rise in ways that few developed countries have experienced – since in most countries, the homeless population is typically comprised of people with poor work histories, documented mental illness, or substance abuse. In Greece, the newly homeless are men and women with solid work histories whose lives have been torn asunder by this present state of crisis.
Just a few short months ago, the banks closed, as there was not enough paper currency in circulation to meet demand. Even after they reopened, there were long lines of citizens waiting to withdraw the limited cash allowance permitted by newly-enacted policies. Meanwhile, formerly productive members of society have been reduced to becoming street vendors where they can, and beggars when all else fails. The people of Greece are increasingly despondent, and new austerity measures are on the way. Most expect the misery to deepen.
Many Solutions Proposed…
In the midst of this human catastrophe, there have been a variety of solutions proposed for not only Greece, but for other nations facing similar situations. Some, like U.S. economist Paul Krugman, have advised that Greece could resolve the issue by simply leaving the Eurozone altogether – something that the EU’s original bailouts were designed to prevent. Still, given the failure of those bailouts – they went almost entirely toward repaying Greece’s loans and thus had no appreciable effect on repairing the Greek economy – and the harsh terms being imposed by European leaders, the desire to leave might soon reach critical mass.
Other solutions range from assembling a conference on European debt to restructure the entire Eurozone’s debt situation to negotiating yet another bailout. The former option might work, but it would require shared sacrifice across the continent – something for which there seems to be little appetite at present. As for the latter possibility, previous bailout efforts have been coupled with austerity measures that many blame for the current state of Greek economic depression. It’s difficult to see how even more austerity and further destruction of Greece’s economy can do anything other than create even more hardship for the Greek people.
Perhaps the most interesting of the proposed solutions involves the idea of issuing digital currency cards that would allow citizens to access their Euros in digital form. That would, in theory, overcome the paper currency shortage that is limiting withdrawals at the present time, and allow greater spending. Again, though, even that offers little more than a band aid for what is at present a critical economic wound.
The DNotes Solution…
DNotes’ Alan Yong believes that there is a better way, and one that offers more than a temporary stopgap solution for the Eurozone’s present state of difficulty. That solution, Yong believes, involves the adoption of a global digital currency to supplement the Euro. In this view, a currency like DNotes or bitcoin would not replace the Euro in any way, but would instead provide a viable asset class that could help to prevent the type of total economic shut down the Greeks faced when their banks closed.
An economic system that encourages citizens to have some of their assets in a parallel digital currency like DNotes would ensure that those citizens maintained some control over their spending power, regardless of what happened with national fiscal and monetary policy. Just as asset diversification is viewed as an essential part of any sensible investment strategy, currency diversification of this kind would be a prudent practice.
The fact is that neither Greece nor the other European Union member states can afford to experience the type of “sudden stop” in economic activities that Greece experienced this last summer. Nor is it inevitable that such stoppages must occur. The key to preventing such mass economic disruption – and the social unrest and individual angst and misery that follows it – is to take affirmative action to ensure that the supply of currency cannot suddenly be cut off by something like a lack of hard currency reserves.
An honest assessment of the consequences of the last sudden stoppage of economic activity showed us exactly how devastating the cessation of economic activity can be not only on the well-being of nation-states or cities, but on the lives of people. When funds stop flowing, supply lines shut down as letters of credit are withheld. Economic activity at every level grinds to a halt, businesses shutter their doors, and families endure one hardship after another.
Can a digital currency like DNotes prevent that sort of economic death spiral? Yong believes that it can certainly play a vital role in helping to prevent the type of economic shutdown the world witnessed in Greece months ago. Not only can cryptocurrency serve as an important form of asset for individual Greeks who might lose access to their Euros as the result of another bank shutdown – providing them with currency that can feed their families and maintain economic activity in their local communities – but it can also serve as a facilitator for large-scale trade when letters of credit are difficult to obtain.
In fact, a digital currency is the perfect system for international trade, and meets all of the qualities associated with the standard letter of credit. All of the conditions stipulated in a typical letter of credit including conditions for release of payment upon satisfactory inspection of finished goods and proof of shipment can all be incorporated using Blockchain smart contracts – and at a fraction of the current cost.
The Euro would remain the primary binding currency for Eurozone member states, while the chosen cryptocurrency would offer a parallel system for holding assets and retaining access to purchasing power. With a global digital currency built with trust and integrity, access to that purchasing power could be realized by all without respect to their financial or economic standing. Even those without access to banking services could enjoy the benefits of holding and using such a currency.
The fact is that the other likely scenario is that the Greeks eventually leave the Eurozone altogether. However, given the country’s economic situation, even a return to the drachma would not likely provide much solace for the people of the nation – since their national currency would likely have little value outside the country’s borders. Moreover most Greeks will understand this truth, and that increases the likelihood of further runs on the nation’s banking institutions. Many desperate citizens may simply try to withdraw Euros before those Euros are replaced with drachmas that will almost assuredly be worth much less than their current holdings.
A digital currency that maintains a value set by the global community is the clear solution, as it offers the best opportunity for providing stability at the national and local level even amid political turmoil. And since this option would not serve as a replacement to the Euro but a supplement, it is not a solution to be feared by those who remain understandably committed to the single European currency they created almost two decades ago. Instead, it is perhaps the best chance for avoiding an even worse economic shutdown in any of the Eurozone’s debt-ridden member states.
Authors: Alan Yong, Chris Cooper, & Ken Chase