The Beginning of the End for the Euro

A little over two decades ago, the elites of Europe met in Maastricht, the Netherlands, to realize a long-held dream. It was to create a common currency that could be used throughout Europe, and possibly, the world.

The “euro” arrived, with great fanfare, in 1999, as a trading-only electronic currency. Three years later, the “eurozone” officially came into being. 11 national currencies were abolished and exchanged for euros at a fixed exchange rate.

Over the next decade, a growing number of European countries clamored to get on board. The eurozone eventually grew to 19 members.

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Like so many other grand plans, the intentions of the European elites were good, albeit self-serving. The European Union (EU) itself was cobbled together after World War II to help prevent the rise of super-nationalists like Adolph Hitler. The euro was another step along the way. As former German Chancellor Helmut Kohl often said: “We seek a European Germany, not a German Europe.”

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And the promised benefits were impressive:

  • No exchange rate uncertainty. Eliminating exchange rates ended the ability of any one country to devalue its currency to boost exports.
  • Transparency and competition. A single currency was supposed to increase competition within the eurozone, lower consumer prices, and improve investment opportunities.
  • Reduced foreign exchange costs. Businesses and tourists in the eurozone no longer needed to pay foreign exchange fees.
  • Larger capital market. The eurozone integrated financial markets across Europe, leading to a freer flow of capital.
  • Less risk from exchange rate speculation. Speculators like George Soros have proved they can force down the value of individual currencies by taking huge short positions. But it’s much more expensive, and riskier, to target a major currency like the euro than, say, the Greek drachma.
  • Reserve currency. From the outset, the architects of the euro intended for it to be a viable alternative to the deutschmark, British pound, and the US dollar.

Countries that joined the eurozone promised to abide by the “convergence criteria” of the Maastricht Treaty, signed in 1992. These included price stability, a government budget deficit of 3% or less of GDP, a debt-to-GDP ratio of 60% or less, exchange rate stability, and long-term interest rates no more than 2% above the rates prevailing in EU member states with the lowest inflation.

Based on these requirements, several members of the eurozone should never have been admitted. I explained in this essay how the Greek politicians engaged in such sleights of hand as not counting military spending as a government expenditure in order to qualify.

But fudged admission standards were far from the only flaw in the plan. Another was inflation. Despite the promise of price stability, prices for many products and services in euros were substantially higher than their equivalent values in the now defunct national currencies. I witnessed this firsthand when I was living in Vienna during Austria’s transition from the schilling to the euro. I especially noticed this trend in the cost of food and beverages. For instance, a Grosse Bier (large beer) typically cost AS35 in 2000. Three years later, the same beer (still very tasty) cost €3.50 – nearly 40% more in schilling terms.

But the largest problem of all was that once the countries using the euro abolished their respective national currencies, they lost control of monetary policy. This authority passed to the European Central Bank (ECB), based in Germany. And a monetary policy that might be good for Germany might not be appropriate for, say, Greece or Cyprus.

Moreover, what European nation will step up to the plate and spend the billions – or even trillions of euros necessary to back it up? In the US, the dollar is backed by the “full faith and credit” of the US government. But what national government backs the euro?

Not Germany, the largest and healthiest economy in the eurozone. Chancellor Angela Merkel has made it clear that her country won’t bail out miscreants like Greece. And now, it’s SHTF time.

Last week, Greece missed a $1.7 billion payment to the International Monetary Fund (IMF) – a small part of the $260 billion it owes international creditors.

Then, two days ago, in a national referendum, Greek voters rejected an ultimatum from the IMF that would require the country to embrace further austerity measures. That would worsen unemployment – already exceeding 25% – and require further cuts in pensions and benefit payments, which have fallen by more than half since 2010.

As a result, Greece is likely to leave the eurozone – perhaps as soon as this week.

In the meantime, Greece closed its banks and imposed capital controls. Bank depositors can withdraw only €60 per day. When the banks reopen, it’s likely that depositors will see their euro savings accounts forcibly converted into drachmas, Greece’s old – and now newest – currency.

The price of treating economic basket cases like Greece as if they were well-ordered societies like Germany has finally become clear. Without a lender of last resort, it’s up to Germany and other wealthy EU countries to pick up the tab if they want the euro experiment to continue. And it’s clear they’re not willing to pay.

Greece is only the first domino. In the next few years, I anticipate the economies of Southern Europe, which are almost as badly managed as that of Greece, to follow in its footsteps. Spain, Italy, and Portugal will be the first to depart from the euro after Greece. Next will be France and Ireland, which aren’t in much better shape financially.

In the end, there will be a core group of countries still using the euro, with Germany, as always, presiding over it. And Germany itself might exit the euro, if its voters tire of being asked for handouts by the remaining eurozone countries. If Germany goes, there’s not much left to keep it together.

There’s a larger lesson here as well, no matter what country you live in. Only hours before imposing capital controls and closing banks, Greek politicians promised they would never do so. Like politicians everywhere, they lied.

Moving money into assets that the politicians in your country can’t steal from you is the only way to protect yourself. At home, that means stockpiling cash, gold, food, and other tangible assets. It also means making investments outside your own country. An offshore bank account, international real estate, or precious metals in a secure private vault are all good ways to begin.

There couldn’t be a better time to start making preparations than now.

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