Will The Internet Take Down The Euro?

If the Internet helped coordinate civil unrest and take down Mubarak and Ben Ali, why shouldn’t it play a crucial role in the demise of the euro?  Of course, the Internet can’t do these jobs by itself.  In the case of Egypt and Tunisia, authoritarian and corrupt governance systems created discontent.  When disaffected citizens took to the streets, their use of Facebook and Twitter amplified their power.  The formula: poor governance plus a disaffected citizenry plus the Internet equaled revolution.

The euro is a noble idea and its designers had noble goals and hopes.  One was that the euro would facilitate trade and commerce among euro zone members, and it has.  Another was that the euro would become a widely-used reserve currency.  This, too, has happened. The euro is currently the world's second-largest reserve currency.  A third goal was that the euro would enforce fiscal discipline on its members and constrain profligate spending by irresponsible governments. This is a goal it is struggling to meet. Witness the problems in Portugal, Ireland, Greece, and Spain – and now Italy -- that have the potential to be magnified in an Internet-driven, overconnected world. The result could be a dead euro, or a severely maimed one.

The euro can serve the interests of all the countries that adopt it only if their economies are similar.  The reason is that any country's monetary system acts as an economic control system.  Monetary systems act as economic thermostats.  If they are not set to the right economic temperature problems are certain to develop.

Think of euro members as occupants of a skyscraper with only one thermostat, on the shady side of the building.  For the residents on the shady side, such as Germany, the temperature is always right.  But for a country like Greece, located in the sunny south, the temperature is always wrong.  To make both the Germans and the Greeks happy at the same time, the Greeks would have to move to the shady side.

But here's the problem: in order to be a resident of the shady side of the building the Greeks will have to make their economy similar to the German economy in several respects.  This is almost impossible task.

Consider the current state of affairs: German citizens pay their taxes but many Greeks do not.  Some officials estimate that $30 billion in taxes go uncollected.  This number is about 10% of Greece's GNP. Greece's budget deficit was around 10.5% of GDP in 2010, compared with around 3% for Germany. Germany's economy runs a trade surplus of over $150 billion per year while Greece ran a trade deficit approaching 10% of GNP. It is difficult to see how a currency that works well for Germany would meet Greece's needs.

Unfortunately, in order to borrow the money it needs to keep the country going, Greece is being forced to submit to economic occupation by the foreign euro’s rulers. Those who rule the Euro are relatively benign potentates but they have put Greece into an economic straitjacket. Their goal is to constrain Greece in ways that will make its economy more similar to Germany's.  Greece is having to cut government spending to reduce budget deficits, lower wages so it can compete in world markets, raise taxes on citizens that are earning less, search for ways to collect taxes from scofflaws, and create economic growth at the same time in order to reduce unemployment.  Unfortunately, the Euro debt remains stable as the sources of income continue to shrink.

Economists can debate whether the straitjacket is the best approach to solving Greece's problem.  But one thing is certain: the straitjacket approach will be successful only if there is an adequate level of support from Greece's leaders and citizens.

This is where the Internet comes in.

Email, Twitter, Facebook, and texting make it easier to organize civil disobedience, strikes, and demonstrations.  A government mistake--like cracking a few heads with a baton--gets amplified a hundred times over when videos that show only the protestors side go viral.  All of this is a way of saying that the Internet mob has joined Greek politicians and foreign economic rulers to form a triumvirate determining the fate of the Greek economy.  I question whether the euro rulers are paying enough attention to the potential Internet mob.  Certainly Mubarak and Ben Ali did not.

Right now the euro rulers are focusing a lot of attention on getting the private sector to participate in the bailout. This is of course a very important issue but I suspect popular support for the straitjacket may be an even more important issue in the Facebook Age.

There is a good chance the Internet could play a starring role in taking down the Greek government as it attempts to reach a compromise with the foreign euro rulers.  As the events unfold in Greece over the next months, what happens in Greece may become the economic equivalent of the Arab Spring, affecting Portugal, Ireland, and Spain as well.  If that happens the euro could be severely compromised.

I believe the Internet has rewritten the rules for governing economies.  In an Internet-driven overconnected world, a large group of lowly citizens marching to the drums of their Facebook and Twitter leaders may become as immensely powerful as the euro governors who today make the rules.  It would be well for those potentates to pay as much attention to them as they are now lavishing on the private participation sector.  The citizens of the virtual world, not the bankers, may decide the fate of the euro.