The euro is a failed experiment that should be cashed in
Published in The Australian (Sydney), 10 February 2010
GREECE’s budget problems are not just a worry for this small economy at the periphery of the European Union. It is an acute embarrassment to European elites that pushed through monetary union for political reasons. If they had only listened to economic advice they would have spared their countries a costly economic adventure.
George Bernard Shaw once said if all the world’s economists were laid end to end, they would never reach a conclusion. So it was astonishing when in 1998 a group of 155 well-known German economics professors issued a joint declaration, titled The Euro Comes Too Early, pleading that the introduction of the euro be postponed.
Reading through their arguments 12 years and one global financial crisis later, their reservations about the common currency can only be called prophetic. Noting that since the signing of the Maastricht Treaty in 1991, which started the monetary union, public debt had gone up – not down – in core European countries, the economists were concerned about future budget discipline. Given its weak sanctions mechanism for violations, they warned the union’s so-called Growth and Stability Pact would remain an ineffective means of curbing excessive deficits.
They were proved correct on both counts. Even before the financial crisis, most Eurozone countries were in near-permanent violation of the rules they had set themselves. Annual budget deficits routinely exceeded the limit of 3 per cent of gross domestic product, while total public debt stayed well above the 60 per cent mark in many countries. As predicted by the economists, the consequences of all these transgressions were nil. Apart from some admonishing words from Brussels, no fines or sanctions have ever been imposed on any member state.
This would not surprise the 155 German economists, who cautioned that any stability pact would be futile if more than a very tiny number of countries violated it. With sanctions requiring a qualified majority, and a majority of countries violating the rules, it was entirely predictable that the pledge of fiscal responsibility within the monetary union would remain an empty promise.
The futility of the rules governing the Eurozone was not the only correct forecast of the German economists. They also warned that Europe’s economies were far too different to be united within a common currency. Where flexible exchange rates had once made it possible to adjust for differences between the economic performances of different countries, a common currency would prohibit such steps. Again, this forecast turned out to be true, although in a different way to what the economists might have thought. Back in 1998, many believed countries with inflexible labour markets, such as France and particularly Germany, would be hardest hit by the euro. In fact, this may well have been the hopeful calculation of other Eurozone countries. It was always clear that the euro was meant to curb the economic power of Germany, whose strong deutschmark had long dominated the European economy.
Strangely enough, the euro did not change this but reinforced it. The introduction of the euro kept a lid on wage increases across the German economy, and once again German exporters enjoyed a competitive advantage over their European rivals. The losers in this game were the southern European economies, which no longer had the option of devaluing their currencies in response. This, combined with their chronic inability to reform, meant they slipped further down the European competitiveness ladder.
To make matters worse for these hard-hit southern European states, the European Central Bank in Frankfurt turned out to be influenced by a Bundesbank-like focus on price stability. This strengthened the euro against other currencies, but added yet another worry for Spanish, Italian and Greek exporters.
As a result of these developments, the euro has been a costly disaster for almost everyone involved: for German workers, who have had to live with almost non-existent real wage increases; and for the rest of Europe, where economies were once again subjugated by the German export steamroller.
Given these circumstances, it was only a matter of time before the cracks started to appear somewhere within the monetary union. That it turned out to be in Greece is not a big surprise, given its record of barely concealing its fiscal problems. But Greece is by no means the only Eurozone member with severe economic problems.
It is even clearer now than it was in 1998 that Europe is not ready for a common currency. The problems that have emerged so far will only get worse if monetary union continues.
The renewed political failure to act on this economic analysis only demonstrates that, far from being an inspired economic project, the euro has always just been one thing: a megalomaniac piece of folly designed by economically illiterate political leaders.