Published in ThirdLink Newsletter (Sydney), October 2011 (PDF)
The rise and fall of the Euro is just another chapter in the long history of monetary unions in Europe. The Euro was not the first attempt to unite different European economies and countries by a monetary framework. And it will not be the first such currency to fail.
If Europe’s politicians had paid more attention to the continent’s history lessons they would have been more careful with the design of the Euro. And if they had been aware of previous currency unions, they would have been particularly concerned about Greece.
In the 19th century, it was France that pushed for monetary union. After Napoleon, the French needed a strategy to bolster their influence in Europe. They tried it through monetary alliances. Belgium adopted the French franc after independence in 1830. Switzerland joined them in 1848. Italy followed in 1861, and finally in 1867 Greece and Bulgaria also linked their currencies to the franc.
The French monetary bloc then became the Latin Monetary Union (LMU). It was a union based on the same gold and silver content of coins in all its member countries. Several other European countries from Spain to Serbia joined this union in the following years.
LMU failed and was officially disbanded in 1927 for several reasons. It could not keep up the fixed relationship between gold and silver when more silver flooded the market. Second, there was no central authority to effectively control and coordinate monetary policy. And crucially, member states were cheating on the gold and silver content of their coins. One country was even formally expelled from monetary union in 1908 because of the grossly fraudulent gold content of its coins.
The country in question was none other than Greece.
In watching the current Greek tragedy we are witnessing history repeating. Once again a French initiated monetary union is on the verge of collapse. And once more, this collapse was brought about by a lack of political coordination, cheating member states and ineffective sanction mechanism.
Where the French of the 19th century aimed to increase their geopolitical standing through monetary union, in the late 20th century France made another attempt at European monetary union in order to prevent Germany from becoming the dominant force on the continent.
There is mounting evidence that the introduction of a European currency was President Mitterrand’s condition for France agreeing to Germany’s unification in 1990. Such a deal was recently confirmed by World Bank President Robert Zoellick, who at the time headed the US delegation in the negotiations about Germany’s unification.
France was afraid of an economic powerhouse of 82 million people as its neighbour. Previous experiences of devaluation against the German mark were a source of constant embarrassment to the French. With the Euro, so Mitterrand believed, such German dominance would be a thing of the past.
In forming the Euro, politicians of the 1990s repeated the mistakes of their predecessors a century earlier. In binding together various European countries, they failed to establish an institutional framework to make this monetary union work. They overlooked the structural differences between European economies. Rules for fiscal and monetary stability were insufficient and systematically violated right from the start.
Greece was able to join the Euro although everyone knew that Athens had fiddled its fiscal statistics. France and Germany ignored deficit rules without being held to account. The 60% debt-to-GDP limit set by the EU’s Stability and Growth Pact has been contravened so regularly that it is not even clear why it was legislated in the first place.
The political independence of the European Central Bank was damaged right from the start. Its first president, Dutchman Wim Duisenberg, had been elected for a full eight-year term. However, political pressure ensured that he resigned his position after four years to allow his colleague Jean-Claude Trichet to take over, just as the French government had demanded.
With such ‘independence’ of the ECB, it should not have surprised anyone that in the European debt crisis the bank did not play the role of an impartial arbiter but became deeply involved in fiscal matters. No central bank should ever find itself in such a position.
The loss of good central banking practice started with the acceptance of low-grade collateral. It continued with ultra-loose monetary policy. And it culminated in the large scale purchase of government debt on the secondary market.
The parallels between the decline of LMU and the Euro today are stunning. Despite decades of European integration through the framework of the European Economic Community and later the European Union, Europe has remained a continent of nation states. These nation states continue to have their own national interests, which they are not prepared to compromise for any greater European good. They are still unwilling to delegate decision-making to common institutions or even play by previously agreed rules.
Then and now this lack of political integration is resulting in the collapse of monetary union. Today, however, it is going to be much more costly than in the 19th and 20th centuries.
Back then monetary union was at least still based on commodities – gold and silver. In addition, national currencies continued to exist nominally even though their gold and silver values were harmonised. Today, in comparison, there had never been anything backing the Euro currency but trust. Now that trust in Europe’s political and financial institutions has all but evaporated, it will be even harder to move on to an alternative monetary framework.
LMU existed while Europe was rapidly growing; today it is in decline. Europe is an old and ageing continent. Its governments are heavily indebted; taxes are high; and there is no realistic prospect of Europe growing out of its debt.
Monetary union in Europe was a grand, utopian project. This made it a political dream that has caused an economic nightmare. Europe will pay a high price for ignoring the lessons of history.