Euro crisis: “decision to create a single currency in Europe was an eminently political decision.”

At the Cedar Lounge, WorldbyStorm has a lengthy post detailing his increasing scepticism as a pro-EU[ropean] over the EU Commission’s proposals to “co-ordinate fiscal policy in advance”.

But more importantly to me, however pro-EU I am, as noted above I have to admit that I am becoming more and more dubious about the very notion of an EU polity that transcends national divisions. It seems to me that the distinctions between nations within the EU is so great as to predicate against the sort of polity that exists within the US [the admission that Sarkozy bet the house on assisting Greek by threatening to withdraw from the euro, however dramatic, however sincere or otherwise, simply points up the reality of that – it is all but inconcievable that within any truly federal structure that such a threat would be countenanced or made. The necessity simply wouldn’t arise due to many many different factors but most importantly that the structures would be profoundly different in and of themselves…]. And let’s not dismiss the fact that the US works hard, very very hard – even given the suspicion that is [often] directed against the state within that society – in order to generate that polity. The EU by contrast has avoided such efforts – perhaps naturally, perhaps not.

And, via the Professor, another lengthy post, this time at Bloomberg, covers the political history of the euro – as well as some of WbS’ points.

Former German Chancellor Helmut Kohl, seeing the euro as the capstone of Europe’s economic integration and Germany’s return to the European family after two world wars, opened the door to the deficit-prone southern European countries that the Bundesbank, haunted by the memory of hyper-inflation, wanted to keep out.

Returning from the December 1991 summit in Maastricht, the Netherlands, that kicked off the euro project, Kohl told the German parliament that he wanted “the greatest possible number of countries” in the euro. That gave Italy, Spain and Portugal the encouragement to meet the economic targets to join in 1999 and Greece to follow two years later.

Defenders of the German economic model knew the threat posed by countries such as Italy, whose budget deficit was 10.2 percent of gross domestic product in 1991, when they forced European leaders to set 3 percent as the limit for euro members.

“A well-known German financial leader told me: Fortunately for Germany, Austria is between Italy and Germany,” said Alfons Verplaetse, who oversaw the Belgian central bank from 1989 to 1999. The reckoning was that only Germany and its immediate neighbors would pass the economic tests, limiting the euro to a handful of countries, Verplaetse, 80, said.

Nobel Laureate

Today’s euro is far from what economists like Nobel laureate Robert Mundell call an “optimum currency area.” Gross domestic product per person ranges from 69,300 euros in Luxembourg to 18,100 euros in Slovakia, debt from 14.5 percent of GDP in Luxembourg to 115.8 percent in Italy, and unemployment from 4.1 percent in the Netherlands to 19.1 percent in Spain.

“A currency without a state is difficult to manage,” said former Italian Prime Minister Lamberto Dini, 79, who also served as the nation’s finance and foreign minister. “The decision to create a single currency in Europe was an eminently political decision. It was supposed to bring about greater European integration not only at an economic level, but at a political one.”

Europe’s multi-state structure leaves it without a U.S.- style federal tax and financial-transfer system to smooth discrepancies between richer and poorer regions. The EU’s budget, mostly for farm aid and infrastructure projects, represents barely 1 percent of the bloc’s GDP, compared with European national budgets that average 47 percent of GDP.

The Blueprint

Signs of a mismatch between strong and weak economies and a loose coordination of fiscal policies were noticeable in the earliest blueprint for a common currency.

“In view of the marked divergences that persist between member states in realizing the goal of growth and stability, there is a risk of surging disequilibriums unless economic policy can be harmonized,” Luxembourg Prime Minister Pierre Werner wrote in the 1970 report that introduced Europe’s first bid for a single money.

Four decades later, Werner’s prophecies are coming true, as euro-region governments prioritize domestic needs to pacify voters after the deepest recession in a half century. The EU Commission estimated May 5 that the overall economy will grow 0.9 percent in 2010, not enough to create jobs, after shrinking 4.1 percent in 2009. It predicts unemployment will climb to 10.3 percent in 2010 from 9.4 percent in 2009.

, , , , , , ,

  • George

    Now that your policing and justice bone has been well and truly digested, it’s nice to see you have moved your forensic analysis on to the euro Pete.

    I remember seeing an interview with the old ECB head Wim Duisenberg where he outlined the simple logic behind the euro.

    Before the euro, Duisenberg explained, any time there was some kind of shock to the European economic system there would be a flight to the D-Mark while the Italians and others would simply devalue to stay competitive.

    The Germans would have to get ueber-productive to counter the rise in value of their currency while the Italians sat back and harvested the devaluation fruit.

    Duisenberg said in future the Italians and others would have to implement productivity measures of their own to survive and the Germans would not be the only ones to face the productivity rack.

    I don’t know where the easy credit of the last decade fits in with that but we’re certainly all in it together now.

  • Bernard Connolly’s Dark Vision for the World Economy – 2002 – [pdf file]

    If one looks just at the economic factors, one sees a world in which three currencies predominate. Of those three, one — the euro — was created in the knowledge, and perhaps with the intention, that it would provoke financial, economic and political crisis in at last some of the countries trapped in its embrace; it is quite simply a congenitally bad currency. ..

    In Europe the advocates of monetary union have always been quite clear about the unpleasant financial implication of a single currency. For them, the crisis that will be created by the euro represents the route to establishing colonial administration in the smaller EMU countries.

  • Pete,

    You may be interested in Joseph Stiglitz’s recent piece in the Guardian from a left-Keynesian perspective and which touches on similar issues in the Krugman piece ([url]http://www.guardian.co.uk/commentisfree/2010/may/05/reform-euro-or-bin-it-greece-germany[/url]). Also, there was a piece of research published by the School of Oriental and African Studies (SOAS) in London that I link to and summarise a bit on my blog ([url]http://roevalleysocialist.blogspot.com/2010/03/eurozone-crisis-beggar-thyself-and-thy.html[/url]).

    I too am beginning to worry about the tensions between political decision making and the requirements of a stable transnational monetary system. Of equal importance to the EU Commission proposals “co-ordinate fiscal policy in advance” are the limits which are already placed on member state’s fiscal policies and the implications of a single currency, and the corollaries of these for policy decisions in the current crisis.

  • Pete,

    You may be interested in Joseph Stiglitz’s recent piece in the Guardian from a left-Keynesian perspective which touches on similar issues in the Krugman piece ([url]http://www.guardian.co.uk/commentisfree/2010/may/05/reform-euro-or-bin-it-greece-germany[/url]). Also, there was a piece of research published by the School of Oriental and African Studies (SOAS) in London that I link to and summarise a bit on my blog ([url]http://roevalleysocialist.blogspot.com/2010/03/eurozone-crisis-beggar-thyself-and-thy.html[/url]).

    I too am beginning to worry about the tensions between political decision making and the requirements of a stable transnational monetary system. Of equal importance to the EU Commission proposals “co-ordinate fiscal policy in advance” are the limits which are already placed on member state’s fiscal policies and the implications of a single currency, and the corollaries of these for policy decisions in the current crisis.

  • USA

    George,
    It wasn’t a bone Baker had to digest, it was humble pie.

  • Pete,

    You may be interested in Joseph Stiglitz’s recent piece in the Guardian from a left-Keynesian perspective which touches on similar issues in the Krugman piece (http://www.guardian.co.uk/commentisfree/2010/may/05/reform-euro-or-bin-it-greece-germany).

    Also, there was some research published by the School of Oriental and African Studies (SOAS) in London that I link to and summarise a bit on my blog (http://roevalleysocialist.blogspot.com/2010/03/eurozone-crisis-beggar-thyself-and-thy.html).

    I too am beginning to worry about the tensions between political decision making and the requirements of a stable transnational monetary system. Of equal importance to the EU Commission proposals “co-ordinate fiscal policy in advance” are the limits which are already placed on member state’s fiscal policies and the implications of a single currency, and the corollaries of these for policy decisions in the current crisis.

  • Mack

    Been away for a bit – while I don’t speak German, it does seem that at least a couple of German newspapers were trumpeting the return of the Duetsche-Mark on their front pages last week!

  • Pete Baker

    Mack

    Trumpeting? Or calling for its return?

    Might be a bit late to board that particular boat…

  • Mack

    Pete – don’t speak German so no idea on the specifics, but got the impression they were either calling for the return of the D-Mark or thought it would return. The Irish press are fretting about lost economic sovereignty thanks to the new bailout fund and new EU restrictions, the Germans (at least according to the FT) seem to be more worried about the possibility that the ECB will begin monetising Greek (and other PIIGS) debt.

  • Pete Baker

    Mack

    In the circumstances, it’s not hard to imagine why the German press are less concerned about the loss of economic sovereignty than the PIIGS are.

  • Mack

    Pete –

    It’s potentially a gain of sovereignty – at least in terms of decision making for them. But they’re trending from solvency to insolvency now.

    Constantin Gurdgiev quoting Ambrose Evans-Pritchard – German papers calling for a new hard currency with more select membership –

    http://trueeconomics.blogspot.com/2010/05/economics-16052010-eu-on-brink.html

    German Social Democracy was built on the hard-as-nails / rock solid Bundesbank and an understanding of the tough decisions you have to take to preserve living standards, services etc (e.g. German wages increased 8% since 2001, while Greeks have increased 30% since 2006!). Most of the rest of Europe doesn’t get it and probably can’t live with those restrictions. I seriously doubt the Germans are willing to take the risk that their system can survive a Greek or Italian style central bank!

  • Pete Baker

    Mack

    It’s a bit late to be trying to restrict membership of the euro.

    And getting rid of current members is an equally impossible route to take.

  • Mack

    That’s sort of true. It would be relatively easy for Germany and most of the countries mentioned to leave (at least easier for them than Ireland or Greece). I think they are talking about setting up a new currency.

    Getting rid of current members – and providing appropriate supports for that – might be the least worst option in the long term.