It's not everyday that somebody knowingly hops aboard the Titanic after it's already hit an iceberg. But that's what Lithuania is doing now that it's officially become the euro-zone's 19th member. Don't let the door hit you on your way in.
All kidding aside though, it's another reminder that the euro, which isn't so much a currency as a doomsday device for turning recessions into depressions, has always been much more about politics than economics. The irony is that just as politics is pushing new countries in, it's politics that's threatening to push old countries out — and sink the whole thing.
In Lithuania's case, those politics come down to four words: breaking free of Russia. That, after all, sums up their last 100 years of history. Lithuania gained its independence in 1918 when the Soviets consolidated power by making a separate peace with the Germans, lost it in 1940 when the Soviets and Nazis conspired to divvy up eastern Europe between them, and got it back in 1991 when the dustbin of history gave a belated welcome to the U.S.S.R. Those old fears are new again, though, now that Putin has once again made irredentism Russia's foreign policy. Indeed, it's no coincidence that Lithuania's support for joining the euro has gone from 41 percent in 2013 to 63 percent today in the wake of Russia's incursion into Ukraine.
Freedom, in other words, is worth a euro-induced depression.
It'd better be, because that's what Lithuania has gotten. It pegged its currency to the euro back in 2002, you see, so it's been importing the euro-zone's monetary policy for over 12 years now. And, like the other Baltics, that's ended quite poorly for them. Lithuania went on a borrowing binge — its current account deficit reached a staggering 14 percent of GDP in 2007 — as rates that were too low for its still-catching up economy pushed housing prices if not into the stratosphere, at least into the lower level clouds.
But then Lehman happened, and nobody wanted to lend them any more money. Housing prices crashed, and so did the rest of their economy that, after years of foreign borrowing, had uncompetitively high wages. That left Lithuania with two choices: either give up its hopes of joining the euro and devalue, or cut spending and wages instead. Now, textbook economics would tell you that the easy way out — devaluing — is also the best one. (The easy way out's underrated virtue is that it is, in fact, a way out). That's because people, believe it or not, don't like to take pay cuts, so you have to lay them off to get them to do so. And all that economic pain might not even be for any gain, since people will have a harder time paying back debts that don't fall if their wages do.
This wasn't a textbook case, though, because Lithuania's households had borrowed a lot of money in euros. That meant devaluing would make mortgages harder to pay back just like cutting wages would. So, in a choice between worse and worse, Lithuania went with the one that would bring it closer to Europe and away from Russia. It kept its currency pegged to the euro, and slashed government spending. The result, at its peak, was 17 percent unemployment — a number that, despite large-scale emigration the past few years, is still in the double digits today.
It's easy to underestimate the euro. The economics of it don't make any sense, and it's only the politics that have kept it from falling apart. That's because, as I've said before, the euro is a paper monument to peace and prosperity that has moral authority in postwar Europe. But you can't eat moral authority, and unless you're worried about Russian aggression, people aren't willing to go hungry forever for the idea of "Europe." For every Lithuania that's rushing to jump on, there's a Greece that's looking for the life rafts to escape the Titanic that is the euro.
Europe, in other words, needs to figure out how to end its depression that's now worse than in the 1930s. If it doesn't, the euro might be irreversible just like the Titanic was unsinkable.