January 1st, 2012


The euro was coming!

Late in December of 2001, I got my first euros, a "starter kit" bag of coins purchased at a bank with Spanish pesetas. I took them home and we admired them, all shiny and new. On January 1, 2002, we would begin to use them.

No more peseta, which had served Spain for 133 years. No more peseta prizes in the El Gordo lottery held every December 22. At the lottery drawing, the winning numbers and prizes are always sung, and in 2001, the audience began to sing along — singing goodbye to the peseta. Rarely do average citizens get to participate directly in such a grand historic event as the introduction of a new international currency involving fourteen European countries.

Euro-ready or not, nine days later, midnight struck! People lined up at ATMs on their way to New Year's parties to withdraw the new cash. The Madrid subway system discovered that its ticket machines were not quite euro-ready and didn't work with the new currency, so people got to ride free until that was fixed the next day.

Officially, the euro had existed as a non-physical currency starting January 1, 1999, so we had a long time to get ready. Despite all the preparation, on January 1 a waiter in France got confused and accepted a 5-denomination Monopoly bill as a 5€ bill: both are grayish, the same size, and have big 5's on them.

Here in Spain, we officially had until February 28 to shift over to the new currency, but it took only a few days. By law, we could pay in pesetas and get our change in euros, and that's how we did it: people would buy a 100-peseta cup of coffee with a 10,000 peseta note.

We all had to do a lot of math to figure out equivalents: 166.386 pesetas equaled 1€. For a long time I saw befuddled elderly people in stores helplessly holding out a handful of euro bills and coins to check-out clerks, who would pick out the right amount. The euro had cents, like dollars, and my husband had to teach our landlord how to write a check with decimals. I knew that the copper coins would tarnish soon like US pennies, but Spaniards were dismayed when they saw the pretty coins turn brown.

But even before the euro began circulating, the problems had begun to surface. To avoid paying taxes on under-the-table earnings, many Spaniards kept significant savings in cash — suitcases full of bills. How could they exchange these for euros without paying taxes? They couldn't, so they began spending the pesetas. One December 2001 advertisement for diamonds simply showed jewelry and the tagline: "Honey, the euro is coming and I don't have a thing to wear."

But where they really stashed their cash was in real estate. Spain already had a real estate bubble, and this spending inflated it fast, with unhappy consequences. The video Españistán (with English subtitles) explains the bubble well, although very angrily. Building became uncontrolled. In addition, the European Union's financial policy of low interest rates designed to favor Germany's growth further fueled the real estate boom in Spain and other European countries.

Then, in 2008, the boom blew up. A US financial crisis spread world-wide, and although it hurt Europe in general, it specifically destroyed Spain's real-estate construction business. Suddenly, Spain's national budget went from surplus to deficit as the government coped with unemployment while revenues dropped. Recession struck Spain and other European countries. Then it turned out that Greece, with the help of Goldman Sachs, had lied about its government finances. Borrowing at the low interest rates had kept Greece afloat for a while, but starting in 2009, it couldn't pay back the money it had borrowed.

Meanwhile, many European banks held the toxic assets created in the US, as well as local mortgages and other real estate investments that had suddenly lost much of their value — but they didn't know exactly how much they had lost, since the investment securities were opaque. They also held Greek government bonds, and since banks had become weak, they couldn't afford to take a hit from Greece, which for some of them would have been a big hit.

The European Union responded by forcing the banks to do that, and a tottering system began to tilt. The fault, supposedly, lay with the PIGS — Portugal, Ireland, Italy, Greece, and Spain — for having acquired too much debt due to unwise spending. In truth, Germany's government had high indebtedness, too, and its smaller banks had frightening balance sheets. In spite of that, financial speculators decided that Germany, whose economy was still robust, would never default, but the PIGS might, so speculators pushed up interest rates on those governments' bonds, which only deepened those countries' debts and troubles.

Social spending has always had ideological enemies, and the debt crisis let these ideologues claim that the error lay in bloated government budgets. Germany, who as it turned out unilaterally runs the European Union, demanded austerity budgets from those countries that slashed social spending in exchange for getting a little protection from speculators. In effect, this was like punishing a man for starving by sending him to bed without his supper.

That's where we are in January 2012. The problem is financial, not fiscal: banks, not budgets. But no one wants to deal with the thorny problem of a dysfunctional financial sector, and "morally upright" northern European countries don't want to pay for the supposed errors of southern Europe.

Simple mechanisms could solve this crisis fast, such as having the European Central Bank behave more like the US Federal Reserve and be a lender of last resort (in effect, printing money), permitting inflation, or issuing Euro-bonds. But Germany, specifically Angela Merkel, says no.

Instead, it's relatively easy to force budget cutbacks. And yet if budgets aren't the root problem, cutbacks won't solve the crisis. Cutting government spending will only deepen the recession, and things will only get worse.

The joy of a decade ago has given way to gloom, and in a recent survey, 70% of Spaniards said the euro has been of little or no benefit to Spain.

— Sue Burke