In These New Times

A new paradigm for a post-imperial world

The euro hasn’t failed – its member states have

Posted by smeddum on December 7, 2010

Benjamin Fox

03 December 2010


They should give genuine economic and monetary union a try.

Roy Jenkins’s dream could still become a reality 

First Greece and now Ireland have highlighted the weaknesses in the eurozone – and have been savaged by the bond markets in the process. In May, a desperate Greek government finally got the bailout it needed to avoid collapse. Last month Ireland, in denial about its own impending disaster, had to be dragged, kicking and screaming, into accepting a bailout without which its banks, which owe British banks £179bn, would have gone bust. The suffering that these bailouts will cause both nations’ citizens in the coming years makes Britain’s own austerity programme pale into insignificance.

Meanwhile, and entirely predictably, Eurosceptics have hit the airwaves to tell anyone who will listen that the euro is dead or, at least, should be put to sleep as a failed political project. Is the eurozone a failed project? Not yet, but it will be if Europe’s leaders don’t work together to sort out its shortcomings.

The euro passed through its first decade apparently unscathed. After being derided by some as a “toilet currency” in the early 2000s, it has become the second-largest global currency, even despite its crises this year. Make no mistake, the eurozone’s reputation has taken a battering in 2010, but if its member states learn their lessons it should emerge much stronger than it was before.

For a number of years we have in effect had a “two-speed” eurozone, between countries that kept their economies stable and remained competitive so that they could export their goods to the world’s largest single market, and those who saw euro membership as if it were like joining an elite club – a “life raft” that would protect them. Put plainly, the eurozone has had monetary but not economic union.

This is the root of the problem. If there is little or no convergence between its members, then neither the Irish and Greek bailouts nor the proposals to tighten the EU’s rules on budget deficits and government debts will solve the fundamental problem. In the past decade a huge gap in terms of competitiveness has emerged between the likes of Germany and the Scandinavians and the likes of Greece, Portugal, Spain and Italy.

As a result, the first group of countries, with their lower labour costs and higher productivity, run big export surpluses, while the latter run large trade deficits. This imbalance has been growing for years and become a vicious circle. It is this vicious circle, which has not been addressed, that, compounding the likes of Greece and Italy spending far more than they have, has caused the eurozone’s crisis.

One wonders why it has taken a decade for Europe’s leaders to see the glaring need to tackle this problem. But now every EU country is paying the price through the bailouts – though not as painfully as the Irish or the Greeks. The solution is reasonably straightforward. Germany may be Europe’s most successful exporter, but that is in part because it keeps its wage levels artificially low and constrains consumption. The likes of Germany, which, together with France, which was among the strongest advocates of Economic and Monetary Union (EMU), have to realise that these wage and consumption policies are part of the problem.

So what is needed is a combination of two things. The Mediterranean countries need to increase their productivity and lower the costs of their labour so that they can export their way back to sustainable growth. The Germans and others should loosen the purse strings on wages, accept slightly higher inflation and encourage an increase in domestic consumption. It won’t be popular with either group of countries right now, but it is what they signed up to. If these measures aren’t implemented, we will almost certainly have countries leaving the euro.

Many will argue that any credible form of economic union and convergence between the likes of Germany and Greece is a pipe dream. If they are right, then the eurozone, in its present form, is a dead duck. But the Irish and Greek crises have shown that the economic and monetary union that was the brainchild of Roy Jenkins, that was then driven by Margaret Thatcher’s nemesis Jacques Delors and agreed in the Maastricht Treaty, has not yet been tried. Better to test it properly first before pronouncing it a failure.

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