You can’t bank on the euro

No common currency has succeeded without a single government: Martin Vander Weyer on the growing likelihood that the euro will fail All sorts of revealing things have been said in recent days about the survival chances of the euro. Jean-Claude Trichet, president of the European Central Bank, declared that talk of disintegration was ‘complete nonsense’, as crazy as the suggestion that California might break away from the dollar. EU economics commissioner Joaquin Almunia reached for a different comparison, describing the euro as ‘an old-style marriage where divorce does not exist’. Meanwhile a spokesman for the German Bundesbank said the bank’s president, Axel Weber, considered the euro to be ‘a unique success story’ and that ‘he will not participate in such an absurd discussion’ despite a story in Stern magazine that he had done precisely that, in a secret meeting with German finance minister Hans Eichel and a group of independent economists.

Then there was Peter Mandelson, in a television interview with Jonathan Dimbleby, declaring that the single currency was ‘absolutely not’ an issue in the crisis provoked by the French and Dutch referendum results. ‘Let’s park that one straight away,’ said the EU trade commissioner, with that sinister little smile of his.

Well, let’s not park it quite so quickly. In fact, why don’t I assume the persona of Jeremy Clarkson on Top Gear and take this crazy concept car of a self-destructing euro for a spin round the track, to see how it holds together? Because the Bundesbank chief was right to call the single currency a success only in the very narrow sense that it succeeded in coming into existence despite a great many predictions to the contrary. Beyond that, even the most objective observer would acknowledge that its achievements are hard to praise. It has not, for example, done what its inventors hoped it would do in leading to significant ‘convergence’ between the national economies of the eurozone. As to more precise economic targets set for it, there were none — but I did once ask the then EU commissioner, Yves Thibaud de Silguy, at the time when he was in charge of monetary affairs in the run-up to the euro’s launch, what outcome he would like to see in terms of jobs and growth.

He blinked through his big French specs and replied, to my amazement, that no one had ever asked him this question before. But if he had to put numbers on it, he continued, after a long pause for thought, he would venture ‘half a point on economic growth and some hundreds of thousands of jobs’ across the eurozone. We cannot actually measure the result, because we do not know what would have happened if the euro had never come along. What we can say objectively, however, is that the eurozone is now trailing far behind Britain and the US in terms of growth, and has roughly double our level of unemployment. If the best that can be claimed is that without the single currency the Continent would have been even deeper in the mire, that is not much of a commendation.

But many citizens of the eurozone are far from objective, and would not give the euro any commendation at all. They are suffering economic pain, fear and humiliation, and they are beginning to blame the currency sometimes correctly, sometimes as a scapegoat for a lack of will in other aspects of economic policy — for woes on every side.

And the Bundesbank man was not even half right when he called the euro ‘unique’. History is littered with currency unions that have come undone, most recently the de facto one which held sway across much of the Soviet empire. That example highlights the case which has always been made against the euro, that it can never work in the long term without a parallel shift towards political integration and central fiscal control.

As the historian Niall Ferguson and economist Laurence J. Kotlikoff pointed out in a prescient article entitled ‘The Degeneration of EMU in Foreign Affairs’ five years ago, it is wholly unconvincing to compare the euro with the dollar — as Mr Trichet was trying to do with his reference to California — because in the case of the United States ‘political union came before monetary union’. But the authors cited three monetary unions which do provide useful comparisons, having involved ‘multiple states with only loose confederal ties and negligible fiscal centralisation’. These were all launched in the 1860s and 1870s and dismantled shortly after the first world war; they were the Austro-Hungarian union, the Scandinavian union and, most significantly, the Latin Monetary Union (LMU) between France, Belgium, Switzerland, Italy and Greece. At least one French politician, Félix Esquirou de Parieu, was convinced that the LMU was merely a prelude to European political union — though it is not clear whether this was why his ministerial colleague Eugène Rouher said of him, ‘Il n’a, à aucun degré, aucune des qualités voulues pour ces fonctions.’ In any event, the LMU fell into disarray long before it was finally unwound, chiefly because of fiscal laxity and flagrant rule breaches on the part of the Italians.

Thus does history repeat itself, as today’s Italian prime minister, Silvio Berlusconi, tries to resist the threat of sanctions from Brussels in response to his government’s flagrant breaches of the stability and growth pact, which was designed to hold the euro together by limiting member countries to fiscal deficits of no more than 3 per cent of GDP. Italy’s could be as high as 5 per cent next year, and Berlusconi’s only defence is to point out that several other members, including Germany and France, have breached the pact too.

The Germans in particular regard Italy as one of the luckiest beneficiaries of monetary union — enjoying lower interest rates and cheaper government borrowing while failing to pursue domestic economic reforms which might improve its dismal underlying performance. But that has not deterred Italian politicians in pursuit of a headline from blaming the currency for slow growth and lack of jobs: welfare minister Roberto Maroni, a representative of the Eurosceptic Northern League, gave a shove to last week’s sharp fall of the euro on the foreign exchange markets by calling for a temporary revival of the lira alongside the euro in ‘a system of dual circulation’.

But if that was a bizarre proposal and Italy is temperamentally prone to going off-message, the kind of anti-euro noises now coming from Germany and the Netherlands are to be taken much more seriously. Pro-euro commentators have pointed out that polls saying 56 per cent of Germans hanker for a return to the prosperous days of the deutschmark do not signify very much, for the dubious reason that there never was a majority for the switch to the euro in the first place. But Germans are nothing if not logical, and if they thought the euro had worked to their advantage, opinion would certainly have swung by now.

As it is, the popular feeling is that the onesize-fits-all euro interest rate and the accompanying fiscal straitjacket have driven Germany to near-zero growth and record unemployment, while disproportionate benefits have accrued to the less deserving Spanish and entirely undeserving Italians and Greeks. The economy minister Wolfgang Clement articulated some of this last week with a complaint that ‘the European-wide interest rate does not take enough account for my taste of Germany’s contribution to the rest of Europe’ and we can expect a lot more in the same vein in an autumn general election, which Chancellor Schröder is most unlikely to survive.

In Holland there is a widespread belief that the guilder joined the single currency system at too low an exchange rate, and that the changeover led directly to a burst of inflation. As the economist Hamish McRae pointed out in the Independent after a visit to Amsterdam on the eve of the referendum, this is ‘not something that plays well among the thrifty Dutch’, and was clearly a reason for the strength of the ‘Nee’ vote, even though the constitutional treaty on which they were voting had nothing to do with monetary arrangements. In France the ‘Non’ was attributed to a combination of resistance to so-called Anglo-Saxon market reforms, xenophobia and disenchantment with President Chirac, rather than dislike of the euro — but the French, like the Dutch, have noticed a leap in the prices of food and consumer goods since the changeover, and in an atmosphere of rising popular disgruntlement the currency is bound to become a target.

But is it, as Mr Almunia implied with his remark about ‘old-style marriage’, impervious to assault by virtue of the political and technical strengths of its construction? Leaving aside the historical observation that old-style marriage never stopped old-style monarchs from seeking divorces and annulments whenever it suited them, let us examine the idea that the undoubted success of the euro in passing swiftly and efficiently into mass circulation gives it a standing and permanence that can never be reversed.

Actually, it proves the exact opposite: that it is relatively easy to launch a new currency, and it would be just as easy to relaunch a set of old ones. After Czechoslovakia’s ‘Velvet Divorce’ in 1993, it did not prove difficult to separate the Slovak koruna from its Czech equivalent, and the fact that the Slovak currency now trades at a large discount to its neighbour is good both for Slovak competitiveness and for Czech self-esteem, neatly illustrating the enduring utility of national currencies. The euro’s defenders would counter by pointing out that several exComecon nations whose currencies have only recently been restored to independence are now candidates to join the euro at the next available opportunity; but the IMF has warned them not to do so unless their fiscal affairs are in considerably better shape than those of the existing members.

Clearly if the Italians voted to secede from the euro and the Greeks decided to follow, there would be a colossal row about who owns the European Central Bank’s gold reserves and the fate of the ex-members’ euro-denominated government debt. But the bond market — a force of economic nature beyond any politicians’ control — has already recognised the possibility of the first stage of disintegration by increasing the ‘spread’ between Italian and German government paper, and you may be sure that if restructuring the euro without its most delinquent members becomes a political imperative, the French and the Germans will find a way to do it.

You may be sure also that the trouble will not end there, because in the end, without political union, history tells us that the euro experiment is doomed. Our own Christopher Fildes has said so all along, and Ferguson and Kotlikoff, for example, reckoned that ‘generational imbalances’ (the differences between future tax revenues and long-term welfare liabilities in each member country) could topple it by the end of this decade. Others would give it longer, but only if the next generation of political leaders has more backbone for reforms that will boost economic performance, cut dole queues and remove the spotlight of blame from the euro. The spinelessness of the current crop of leaders has done their pet currency project no favours at all; history will judge that, not unlike poor forgotten de Parieu, they over-egged its potential and lacked the political strength to make it more than a temporary, troublesome bodge.